In Austria, Bulgaria, the Czech Republic<sup>3</sup> , Macedonia, Montenegro, and Poland banks are provided with predefined macro scenarios and required to evaluate their impact on the credit, market, and liquidity risk indicators. In addition, Bulgarian banks are asked to define their “worst case scenario” and evaluate its impact. Either all banks or banks comprising the majority of the banking sector assets are considered in these exercises.

There are countries (Hungary and Greece) that carry out a bottom-up stress test involving a survey of a limited number of banks mainly with the purpose of complementing their information and improving their estimates of certain parameters used in the top-down exercise. For instance, Hungary obtains estimation for default rates for unsecured household loans from a survey of eight banks.

Meanwhile, a substantial effort was devoted to the development of stress-testing models to help supervisory authorities gauge the potential effect of severe but plausible macroeconomic downturns on banking sectors’ resilience. As of 2010, the stress-testing models for many CSEECBs moved from simple procedures of evaluating the effects of ad-hoc shocks, to scenario-based macro models. These models are meant to capture features of the banking sector (products and portfolio characteristics) and their reaction to various macroeconomic scenarios. For some CSEECBs, the models in use are the result of several years of research in model-building (as in the cases of Austria, the Czech Republic, Hungary, Romania, and the Slovak Republic), while for other CSEECBs (Bulgaria, Croatia, Montenegro, and Serbia) the stress-test macro models are yet in an incipient form. Nevertheless, all the participating CSEECBs reported that the scenariobased stress-testing models are an ongoing work both in terms of refining the existing models to capture country- and sector-specific features and in terms of considering additional risk factors. The risks considered in the CSEECBs’ stress tests are credit risk, market risk, liquidity risk and contagion risk; however, most CSEECBs focus primarily on credit risk and market risk. Integrating concurrent effects of multiple risks remains a challenge ahead. Especially, integration of credit risk, including indirect credit risk from borrowers’ FX exposures, and liquidity risk for CSEE’s banking systems is crucial, as shown by the ramifications of the crisis.

For many CSEECBs, the limited availability of data (both current and historical), the delays involved in accessing the financial data, and the inconsistencies among various data sources reduce the scope of stress-testing approaches. The CSEECBs that are confronted the most with the problem of data availability appear to be Montenegro, Bosnia & Herzegovina, and Kosovo.

Generally, the implementation of a stress test involves the following steps: (1) constructing macroeconomic scenario(s), among which at least one contains extreme but plausible adverse events; (2) identifying and quantifying risk factors; (3) identifying and calculating risk exposures; (4) mapping macroeconomic variables to risk factors; and (5) mapping risks to outcome indicators (e.g., expected loss, capital adequacy ratio); in addition, dynamic stress-testing models would include (6) evaluating the reaction

> 3 The Czech National Bank introduced bottom-up stress testing exercise in 2009. The results are presented in the 2010 Financial Stability Report (see, CNB, 2010).

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