Assessment on the Effectiveness of Stress Testing in Commercial Bank in Ethiopia
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Date
2017-06
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Addis Ababa University
Abstract
The main objective of the study is to assess the effectiveness of stress testing as an
instrument of risk mitigation in commercial banks in Ethiopia. To this end, the study
adopts mixed research approach and descriptive methods to enable the researcher to
describe current effectiveness of stress test practice as one of strategic means in
mitigating risks in commercial banks. The type of data used was both primary and
secondary as the research design employed was mixed-mode (qualitative and
quantitative). As the study was conducted at institutional level purposive sampling
technique was used to select the banks. Hence, 10 commercial banks have been selected
and contacted, where the sample respondents, staffs of risk management section( risk
experts and officers) were used. Besides, the study is interested in banks that have been
operational and whose ages are 10 and above. As it is a qualitative research, the
research was rely highly on primary data, therefore, appropriate instruments need to be
employed, that has been included Interview, questionnaire analyzed . The findings of the
study show that commercial banks conduct stress testing on historical data and conduct
the extensive sensitivity analysis and very limited hypothetical scenario analysis used on
institutional context. Even though stress test had found to be determinant tool in risk
management, needed to be employed extensively and synergistically in all risk factors by
considering macroeconomic variables. Furthermore, banks should have a written
guideline governing the stress testing framework in place to enhance its effectiveness.
Keyword: Stress testing, sensitivity analysis, scenario analysis, Ethiopian commercial
banks
Description
Keywords
Stress testing, Sensitivity analysis, Scenario analysis, Ethiopian commercial banks