The global financial crisis revealed weaknesses in the stress testing exercises performed on
financial institutions and systems around the world. These failures were most evident in the
area of liquidity risk, where now-obvious vulnerabilities were left largely undetected, with
stress tests having largely focused on solvency risk. This paper uses publicly available data
from a now-defunct bank in Iceland, where liquidity shocks were immense, to demonstrate
how a combination of stress tests of the various risks would have provided a clearer picture
of existing vulnerablities. We show that, ultimately, stress test models do not necessarily
need to be complex or overly sophisticated. Basic stress tests, using appropriate assumptions
and shocks, could reveal key areas of risk to inform contingency planning. The liquidity
stress test templates used in this paper are included.

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Stress Testing——Methods