Dynamic Stress Testing: The Framework for Testing Banking Sector Resilience Used by the Czech National Bank

This paper describes the current stress-testing framework used at the Czech National Bank to test the resilience of the banking sector. Macroeconomic scenarios and satellite models linking macroeconomic developments with key risk parameters and assumptions for generating dynamic stock-flow consistent behavior of individual bank balance-sheet items are discussed. Examples from past CNB Financial Stability Reports are given and an emphasis is put on conservative calibration of the stress-testing framework so as to ensure that the impact of adverse scenarios on the banking sector is not underestimated.