Bottom-Up versus Top-Down Stress Test
From Open Risk Manual
Bottom-Up versus Top-Down Stress Tests
Bottom-Up versus Top-Down stress tests are distinguished in the context of Bank Stress Testing. The following table summarizes their relationship[1]
Aspect | Bottom-Up Stress Test | Top-Down Stress Test |
---|---|---|
Who is carrying out the test? | By the firm itself | By regulatory authorities / central banks |
Who's assumptions is it based on? | Firm's own assumptions or scenarios, with possible constrains by authorities | General or systemic (macro-prudential) assumptions or scenarios designed by regulators and applicable to all relevant institutions |
What data granularity does it require? | Based on the firms’s own data and a high level of data granularity (possible use of external data) | Based mostly on aggregate institution data and less detailed information |
How comparable is it across firms? | Little comparability as methodologies may differ substantially | Enables uniform and common framework and
comparative assessment of the impact of a given stress testing exercise across institutions |
Issues and Challenges
- The terminology might be confusing as "bottom-up" methodology refers also to calculation approaches that focus on aggregating individual entity vulnerabilities as opposed to a top-down macro-economic view being propagated to the constituents of the portfolio (See Best Practices in Credit Portfolio Management)
References
- ↑ EBA/CP/2016/28