A simple stress testing application on Turkish banking system

Stress tests are quantitative tools used by banking supervisors and central banks for assessing the soundness of financial systems in the event of extreme, but still plausible, shocks. They are also an important management instrument for banks since they provide financial institutions with useful indications on the reliability of the internal systems designed for the measurement of risks. Under the new Basel Accord on banks? capital adequacy the presence of sound stress-testing methodologies is a prerequisite for the adoption of the advanced methods for the quantification of minimum capital requirements.Stress-tests are particularly useful for risk monitoring and assessment as they make it possible to quantify the likely impact of shocks, which helps to rank risks by their importance and allows assessment and surveillance to be more focused. Moreover, stress-tests can help provide early warning signals and thus contribute to the forward-looking dimension of financial stability monitoring and assessment.In this study, it is aimed to apply a simple historical stress testing to see how strong Turkish banking sector is. To serve this purpose, February 2001 and 2008 Subprime Mortgage Crisis were simulated and shocks were applied to the net foreign exchange positions of the Turkish banking sector?s subcategories and the sector as a whole. The results were used to examine the extra capital needed to be injected to the system.