When it comes to the question of how the pandemic would affect financial stability and the resilience of specific banks, policy makers and supervisors are facing challenging questions. For example, how can I run a stress test to simulate the impact of the pandemic (in terms of the decline of GDP) on banks’ capital ratios? When should we unwind any the regulatory relief measures?

 The tool developed by Christian Schmieder uses the most aggregate rule of thumb established by Hardy and Schmieder, mapping GDP growth paths directly into credit loss paths. As such, it provides a solution for a “Stress Test for Everyone” as a starting point to conduct forward-looking scenarios. The stress test can be refined using rules of thumb for the key drivers of bank solvency namely credit losses (including forbearance), pre-impairment income and credit growth as well as risk-weighted assets

 At the current juncture, regulators, supervisors and financial institutions can use the tool to simulate the medium to long-term impact of the crisis on financial institutions’ balance sheets, business models and market practices. 

You can download the self-explaining excel sheet free of charge.

 

And a quick tutorial from Christian and myself on YouTube

Best regards

Roland Raskopf