Financial Stability Analysis in Banking Sector: A Stress Test Method

Abstract

Stability of the financial sector is a matter of debate nowadays. Notably, decision of capital investing in order to hedge against various types of risks is a major problem for the banks. At this phase, stress testing is a basic method to determine whether the capital ratios of the banks are adequate or not. Stress testing, naming in the context of FSAP (Financial Sector Assessment Program) for the first time, was included in the financial stability reports of the developed countries especially in the parts of financial analysis issues. Firstly, they only took part in FSAP partially; thereafter they were used as a tool for financial sector stability analysis by regularity organizations like IMF (International Monetary Fund) and World Bank and also by senior management. Being used for the financial analysis of the banking sector especially in the developing countries like Turkey, stress tests will be analyzed theoretically in this study.