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![handle is hein.amenin/aeiabon0001 and id is 1 raw text is:
Key Points
One of the newst fads it t,,anking regualtion i the use of econometric mode Is to
Imulate a bak peorFarnance over hypothetical rnultyear ecorornic stress scenaro
and te- using the tress test resuits -o caibrate thre bank's minrimum regulatory
capital requirmet.
This PguPIathoy approa fAx serng capiai reqiieerten has beconie Coppua in the
S and Fu-ope yet there is no evidence. that re'guiathr' eCoP.hr stress tet
models genrte accuaate focats of bank peif, rnanee undei stress sc-nani
condtons.
Reg ators keep the spec fic detais of thei- stress test :odes con idential, in 'hitn
Widependent --ifscaltt*r :f their models' accu -acy,
These, a n oth r featurs of regu atoa stress tests iraise i porttant -rga issues and
ceate th epotr A t Kr costly rnisal ocaiors obf anking eso-umes.
Around 75o BC, Babylonja.- king H1-amniurabi
codified a single set of laws to replace ti e patchwos k
of tMfa] laws across his kingdom. Ha.rmurabiVs
laws, inscribed on stone tablets, set legal standards
tr tort. iuheritaEce, contract, and family law that
established principles that are still relevant today.
For examnpi, when you read one of iatnnurabi's
laws, you immnediately understand how to comply
with the law. C(tZens were .presum1ed innoCeat
until proven guilt-v, and false accusations Carried
penaltes, If l-{am'..urabi were still alive today, he
would be shocked that his basic principles of
jurispinhe ce are igniored in thr modern 1-gislation
that mandates regulator:,, stress tests,
The success of the zoca? Federal es-rve Su)er-
.sora Capital Assessmoent Program (CAP)in the
US spawned a new paradigm of baik regulation
built around econometric forecasts of bank peror-
mance under stressful cmditions, Since the SCAP
stress tesrs, ,banking regulators in te US and
Europe have adopted dynamic stress testing as an
important c' ?mnponent of their large financial
institution supervision process. In the US, the
20o Dodd -;rank 'sct requires the Federal Resirer
Board (FRB) to perform annual stress tests. In
{ur rope Article t3 of ELIro peami tnol Regulati' u
No, io95/o o requires the European BanIkl.g
Atkthorry (EBA to develop an adequate stress
testing rehi.
Ham-nurabi would be deeply disappointed if lie
read eiher tUe U1S or EU law mandating regulatory
stress tests. Neither directive explains what is
req..red ifor imnturions to pass an annual stress
test indeed, these directives never define what
comprises a stress test instead, legislators
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