MAS Staff  Paper No. 34, Aug 2004

FSAP Stress Testing : Singapore's Experience

By Chan Lily and Lim Phang Hong

Abstract

Singapore participated in the IMF-World Bank Financial Sector Assessment Program (FSAP) in 2002-2004.  As part of the FSAP, the MAS coordinated an industry-level stress test involving systemically important banks and insurance companies.  The purpose of this paper is to share the many processes needed to execute a broad-based stress test involving institutions with dissimilar risk management practices, with a focus on credit risk stress test for the banking industry.  Banks typically use a bottom-up, loan-by-loan approach for stress testing their corporate loans, where model estimates are supplemented by judgment and experiences of bank credit officers.  A top-down, portfolio approach is preferred for stress testing consumer loans, given that these loans are usually large in number but small in quantum.  On the whole, the FSAP stress test process required intensive coordination and substantial input of resources by both the participating institutions and the MAS.  Experience gained from the exercise would be incorporated to improve the MAS' regular stress testing of the financial sector.

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