Stress testing practices in risk management - Empirical evidence from the Finnish banking and insurance sectors

The main purpose of this study was to analyze how stress tests are used in risk management in the Finnish banking and insurance sectors. In order to enhance understanding of the topic, stress testing was explored in the context of corporate governance and regulato-ry implications of Basel II and Solvency II on stress testing were examined. In addition, the effects of the global financial crisis on stress testing were mapped and the differences in stress testing practices between the banking and insurance sector were discussed. The research method was qualitative case study and it was conducted by interviewing risk managers from ten institutions and a representative from FIN-FSA. Findings pointed out that stress testing practices vary significantly between different institutions. Interesting observations were made in terms of stress testing practices in the banking and insurance sectors. The increasing importance and use of stress tests were recognized as a result of the financial crisis. Stress testing was even considered more like art than science given the amount of challenges it involves. In general, improvements in stress tests were suggested, with an emphasis on stress concentration between different types of risks.

Stress testing and risk evaluation of new capacity payment algorithm proposed by Market Council

In the Russian Wholesale Market, electricity and capacity are traded separately. Capacity is a special good, the sale of which obliges suppliers to keep their generating equipment ready to produce the quantity of electricity indicated by the System Operator. The purpose of the formation of capacity trading was the maintenance of reliable and uninterrupted delivery of electricity in the wholesale market. The price of capacity reflects constant investments in construction, modernization and maintenance of power plants. So, the capacity sale creates favorable conditions to attract investments in the energy sector because it guarantees the investor that his investments will be returned.

Hitsatun kerrossihtilevyrakenteen soveltuvuus sellutehtaan laitteiden suodatinpinnaksi

Tässä diplomityössä tutkittiin hitsaamalla valmistettavan kerrossihtilevyn soveltuvuutta eri sellutehtaan laitteisiin mekaanisen kuormituskokeen, korroosiokokeen ja syrjäytyskokeiden avulla. Tutkimusympäristönä käytettiin puukuitupesuria, sillä kerrossihtilevyrakenteen todennäköisimpiä käyttökohteita ovat erilaiset massan pesuun tarkoitetut laitteet. Mekaanisen kuormituksen kokeessa tarkasteltiin kerrossihtilevyn staattista ja dynaamista kuormituksen kestoa painevaihteluiden avulla pesurin koelokerossa ja verrattiin sitä porattuun reikälevyyn. Kokeessa käytetyn kerrossihtilevyversion todettiin olevan huomattavasti porattua saman paksuista reikälevyä heikompi dynaamisen kuormituksen alaisena. Syrjäytyskokeilla määritettiin syrjäytysnopeus erilaisilla reiänhalkaisijoilla ja –jaoilla sekä tutkittiin väriaineen avulla sokeiden tukikannasten vaikutusta syrjäytyspesun homogeenisuuteen levyn pinnassa. Syrjäytysnopeuden todettiin heikentyvän vapaan reikäpinta-alan pienentyessä. Väriaineellisissa kokeissa ei havaittu tukikannasten merkittävästi alentavan syrjäytysnopeutta. Korroosiokokeilla tutkittiin ja vertailtiin laser- ja vastuspistehitsien korroosionkestokykyä kloridipitoisissa olosuhteissa lämpötilan säätelyn mahdollistavan olosuhdekaapin avulla. Laserhitsauksessa parametrien ei havaittu vaikuttavan merkittävästi hitsin herkistymislämpötilaan. Vastuspistehitsaamalla on mahdollista saavuttaa laserhitsien korroosionkesto.

Mapping financial stability

The ongoing global financial crisis has demonstrated the importance of a systemwide, or macroprudential, approach to safeguarding financial stability. An essential part of macroprudential oversight concerns the tasks of early identification and assessment of risks and vulnerabilities that eventually may lead to a systemic financial crisis. Thriving tools are crucial as they allow early policy actions to decrease or prevent further build-up of risks or to otherwise enhance the shock absorption capacity of the financial system. In the literature, three types of systemic risk can be identified: i ) build-up of widespread imbalances, ii ) exogenous aggregate shocks, and iii ) contagion. Accordingly, the systemic risks are matched by three categories of analytical methods for decision support: i ) early-warning, ii ) macro stress-testing, and iii ) contagion models. Stimulated by the prolonged global financial crisis, today's toolbox of analytical methods includes a wide range of innovative solutions to the two tasks of risk identification and risk assessment. Yet, the literature lacks a focus on the task of risk communication. This thesis discusses macroprudential oversight from the viewpoint of all three tasks: Within analytical tools for risk identification and risk assessment, the focus concerns a tight integration of means for risk communication. Data and dimension reduction methods, and their combinations, hold promise for representing multivariate data structures in easily understandable formats. The overall task of this thesis is to represent high-dimensional data concerning financial entities on lowdimensional displays. The low-dimensional representations have two subtasks: i ) to function as a display for individual data concerning entities and their time series, and ii ) to use the display as a basis to which additional information can be linked. The final nuance of the task is, however, set by the needs of the domain, data and methods. The following ve questions comprise subsequent steps addressed in the process of this thesis: 1. What are the needs for macroprudential oversight? 2. What form do macroprudential data take? 3. Which data and dimension reduction methods hold most promise for the task? 4. How should the methods be extended and enhanced for the task? 5. How should the methods and their extensions be applied to the task? Based upon the Self-Organizing Map (SOM), this thesis not only creates the Self-Organizing Financial Stability Map (SOFSM), but also lays out a general framework for mapping the state of financial stability. This thesis also introduces three extensions to the standard SOM for enhancing the visualization and extraction of information: i ) fuzzifications, ii ) transition probabilities, and iii ) network analysis. Thus, the SOFSM functions as a display for risk identification, on top of which risk assessments can be illustrated. In addition, this thesis puts forward the Self-Organizing Time Map (SOTM) to provide means for visual dynamic clustering, which in the context of macroprudential oversight concerns the identification of cross-sectional changes in risks and vulnerabilities over time. Rather than automated analysis, the aim of visual means for identifying and assessing risks is to support disciplined and structured judgmental analysis based upon policymakers' experience and domain intelligence, as well as external risk communication.