Abstract
Stress testing is an important tool for risk management in the operation of Islamic financial and capital markets. Islamic financial market’s (IFM) instruments use different stress testing and liquidity risk approaches due to considerations relating to their regional, regulatory, legal, product and operational requirements that may dictate a certain approach and stress scenarios to manage the associated risks and test their ability to absorb market shocks. This chapter provides in-depth insights into the best market practices for stress testing framework for the survival of Islamic financial markets and institutions in the face of possible market shocks, within a sophisticated financial market in Europe. This subject is important for two reasons: firstly, the survival of an Islamic financial market and its institutions is hugely dependent on its risk factors and stress testing management approaches. Secondly, the ability of managing such market shocks without compromising Shari’ah requirements is a very important component for Islamic financial institutions (IFIs). The study collects its data by using the method of a case study to obtain in-depth knowledge from the Bank of England and IFIs in the UK. The findings of the study identify key stress testing steps and assessment in addition to risks that are crucial for the survival of the IFM and its institutions. It also suggests a stress testing approach that could reduce the impact of financial shocks to the IFM and ensure its resilience.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
This requirement is included in rule 12.3 of the Internal Capital Adequacy Assessment part of the PRA Rulebook
References
Ahrens, T., & Chapman, C. S. (2006). Doing qualitative field research in management accounting: Positioning data to contribute to theory. Accounting, Organizations and Society., 31(8), 819–841.
Ali, S. S. (2012). State of liquidity management in Islamic financial institutions. Islamic Economic Studies, 21(1), 63–98.
Bank of England. (2014). Stress testing in the UK banking system: 2014 results. London: Bank of England.
Barfield, R., & Venkat, S. (2008). Liquidity risk management. In The Journal-Global Perspectives on Challenges and Opportunities. London: PricewaterhouseCoopers.
BCBS (2006). The management of liquidity risk in financial groups. Basle: Basel Committee on Banking Supervision.
BCBS (2009). Principles for sound stress testing practices and supervision. Basle: Basel Committee on Banking Supervision.
BIS. (2000). Stress testing by large financing institutions: Current practice and aggregation issues. In April 2000. Basle: Bank for International Settlements.
BIS. (2008). Basel committee on banking supervision- principles for sound liquidity risk management and supervision, September 2008. Basle: Bank for International Settlements.
BIS. (2009). Basel III: international framework for liquidity risk measurement, standards and monitoring, December 2009. Basle: Bank for International Settlements.
BIS. (2010a). Basel committee on banking supervision-iInternational framework for liquidity risk measurement, standards and monitoring, December 2010. Basle: Bank for International Settlements.
BIS. (2010b). Basel III: A global regulatory framework for more resilient banks and banking systems, December 2010. Basle: Bank for International Settlements.
Board of Governors of the Federal Reserve System. (2012). Guidance on stress testing for banking organisations with total consolidated assets of more than $10 billion. Washington, D.C: Board of Governors of the Federal Reserve System.
Borio, C., Drehmann, M., & Tsatsaronis, K. (2012). Stress-testing macro stress testing: Does it live up to expectations? In BIS working papers No. 369. Basle: Bank for International.
CEBS. (2010). CEBS guidelines on stress testing. London: European banking authority.
Czarniawska, B. (1999). Writing management: Organization theory as a literary genre. Oxford: Oxford University Press.
Dyer, W. G., & Wilkins, A. L. (1991). Better stories, not better constructs to generate better theory: A rejoinder to Eisenhardt. Academy of Management Review., 16(3), 613–619.
ECB. (2008). EU banks’ liquidity stress testing and contingency funding plans. Frankfurt: European Central Bank.
FCA. (2014). Stress Testing and Contingency Funding. London: Financial conduct authority.
Fell, J. (2006). Overview of Stress Testing Methodologies: From Micro to Macro. presentation to the Korea Financial Supervisory Commission/Financial Supervisory Service-International Monetary Fund Seminar on Macroprudential Supervision Conference on Challenges for Financial Supervisors, Seoul, November 7, 2006.
Flyvbjerg, B. (2001). Making social science matter. Cambridge: Cambridge University Press.
Garfinkel, H. (1967). Studies in ethnomethodology. Cambridge: Polity Press.
GARP. (2011). A new regulation for liquidity risk. In Global Association of Risk Professionals. New Jersey.
Grundke, P. (2011). Reverse stress tests with bottom-up approaches. The Journal of Risk Model Validation, 5(1), 71–90.
Jönsson, S., & Macintosh, N. (1997). CATS, RATS, and EARS: Making the case for ethnographic accounting research. Accounting Organizations and Society, 22(3–4), 367–386.
Matten. (2009). Stress testing liquidity and the contingency funding plan. PRMIA Members’ Meeting, February 24, 2009.
OSFI. (2009). Stress testing: Sound business and financial practices. Ottawa: Office of the Superintendent of financial institutions.
Peria, M. S. M., Majnoni, G., Jones, M. T., & Blaschke, W. (2001). Stress testing of financial systems: An overview of issues, methodologies and FSAB experiences. In IMF working paper No. 01/88. Washington DC: International Monetary Fund.
Schatzki, T. R. (2005). The sites of organizations. Organization Studies, 26(3), 465–484.
Schmieder, C., Claus, P., Maher, H. (2011). Next Generation Balance. Sheet Stress Testing, IMF working paper. April, WP/11/83.
Schmieder, C., Hesse, H., Neudorfer, B., Puhr, C., & Schmitz, S. W. (2012). Next generation system-wide liquidity stress testing. In IMF working paper WP/12/3. Washington DC: International Monetary Fund.
TATA. (2013). A stress testing framework for liquidity risk. Mumbai: TATA Consultancy Services Limited.
van den End, J. W. (2010). Liquidity stress-tester- do Basel III and unconventional monetary policy work? In Working paper No. 269. Amsterdam: De Nederlandsche Bank.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2019 Islamic Research and Training Institute
About this chapter
Cite this chapter
Alamad, S. (2019). Stress Testing and Reverse Stress Testing: An Approach for a Resilient Islamic Financial Industry. In: Zulkhibri, M., Abdul Manap, T., Muneeza, A. (eds) Islamic Monetary Economics and Institutions. Springer, Cham. https://doi.org/10.1007/978-3-030-24005-9_9
Download citation
DOI: https://doi.org/10.1007/978-3-030-24005-9_9
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-24004-2
Online ISBN: 978-3-030-24005-9
eBook Packages: Economics and FinanceEconomics and Finance (R0)