Miroslav Plašil, Martin Časta
This article presents the CNB’s methodological approach to reverse stress testing, which is a useful complement to the standard bank solvency stress tests. The approach consists in simulating a large number of consistent macro-financial scenarios and their impacts on banks’ capital. Scenarios that lead to a preselected degree of stress – most commonly defined as a breach of the overall capital requirement or a breach of the Pillar 1 and 2 capital requirements – are then analysed in detail. Thanks to its ability to target a wide set of scenarios, reverse testing contributes to the systematic identification of key macro-financial risk factors and makes it easier to pinpoint potential weaknesses that may increase the banking sector’s vulnerability. It also makes it possible to quantify the uncertainty associated with these scenarios. The approach is illustrated on a reverse stress test of the Czech banking sector as of mid-2024.
Issued: March 2025
Download: Thematic article on financial stability 1/2025 (pdf, 1 MB)
