Stress Testing in Risk Management: An Application in theTurkish Banking Sector

Abstract

Stress testing is a risk management tool used to simulate extreme but plausible events and measure how the events would impact firm’s income. Stress testing aims to identify extreme events that could trigger catastrophic losses in a given portfolio. Here, exceptional refers to events of high severity and plausible excludes improbable scenarios. Stress tests also provide actionable information to senior management for decisions around capital allocation and contingency planning. This paper revealed that the Turkish banking system was robust to a number of adverse shocks. Index