DiStress: A distributional approach to bank solvency simulations

Abstract

This paper proposes an approach to bank stress testing — called DiStress (Distributional Stress simulation) — that can run a large number of bank solvency simulations and produce distributions of bank failures. The method is not intended to replace stress tests, but could be used alongside these tests or in the multilateral surveillance of many countries simultaneously. Results from the DiStress method suggest that there is a risk that traditional stress tests could miss the full extent of potential problems in the banking system.