The Effectiveness of Stress Testing Models for Financial Stability

Abstract

This study examines the effectiveness of stress testing models in promoting financial stability, addressing the central question of whether current methodologies adequately capture systemic risk in an increasingly complex economic environment. Using a systematic literature review approach, the study synthesizes peer-reviewed evidence published between 2017 and 2021 to identify advances, limitations, and emerging challenges in stress testing frameworks. The results highlight significant sensitivity to modelling assumptions, scenario design constraints, and difficulties in capturing non-linear or climate-related risks, all of which influence the accuracy and interpretability of stress test outcomes. The article discusses these findings by comparing modelling approaches, evaluating empirical insights on bank behavior, and assessing the integration of emerging risk factors. The study concludes that while stress testing has become more sophisticated and influential, its effectiveness depends on continuous refinement and the incorporation of new sources of systemic vulnerability.