The objectives of stress-testing should be clear to everybody involved, but experience shows time and time again that this is not the case. Provided there is a clear internal consensus about what is to be done and with what aim, a stress-test exercise can be invalidated or reinforced by the choice of scenarios that follows the initiation of the exercise. We go through the prerequisites for combing the potential future with no totems and taboos, and then highlight a few sources for scenarios. The sources can include the unfortunate history of other banks modified as appropriate, what could have happened but fortunately did not, and others as needed.

From the portfolio of candidate scenarios and their variations, we investigate what has to be done to be able to decide if further use is needed, to arrive at the main portfolio of scenarios that will guide a few critical actions. The rewards for such an approach is that the set of scenarios will include the next crisis, therefore putting the bank in the best position to withstand the next turbulent times if not even thrive on them.

The objectives of stress-testing should be clear to everybody involved, but experience shows time and time again that this is not the case. Provided there is a clear internal consensus about what is to be done and with what aim, a stress-test exercise can be invalidated or reinforced by the choice of scenarios that follows the initiation of the exercise. We go through the prerequisites for combing the potential future with no totems and taboos, and then highlight a few sources for scenarios. The sources can include the unfortunate history of other banks modified as appropriate, what could have happened but fortunately did not, and others as needed.

From the portfolio of candidate scenarios and their variations, we investigate what has to be done to be able to decide if further use is needed, to arrive at the main portfolio of scenarios that will guide a few critical actions. The rewards for such an approach is that the set of scenarios will include the next crisis, therefore putting the bank in the best position to withstand the next turbulent times if not even thrive on them.

Stress-testing, as practiced in most institutions, is much too often hijacked by regulatory necessity: to improve one’s standing for the authorities, or by reputational necessities: to reassure the public. A simple way to hijack a stress-test exercise is to use an inappropriate set of scenarios. Hence, it seldom turns out to the useful exercise it can be for bank managers.

After going through the most typical ways to find irrelevant, innocuous and other useless scenarios, we provide a few pointers at how a stress-testing exercise can be improved by a choice of scenarios, and provide a few criteria for finding and selecting appropriate scenarios.