Market-Based Structural Top-Down Stress Tests of the Banking System

Despite increased need for top-down stress tests of financial institutions, performing themis challenging owing to the absence of granular information on banks' trading and loanportfolios. To deal with these data shortcomings, this paper presents a market-basedstructural top-down stress testing methodology that relies in market-based measures of abank's probability of default and structural models of default risk to infer the capital lossesthey could experience in stress scenarios. As an illustration, the methodology is applied toa set of banks in an advanced emerging market economy.