Title:
Macro-Economic Stress Test for Islamic Rural Bank: A Proposed Framework

Authors:
Uvy Dian Rizky, Abdul Mongid, Suhartono Suhartono, Evi Sistiyarini, Indonesia

Abstract:

The stress test is used to manage bank risk to determine how certain a crisis scenario will affect their portfolio value so that it can be used to forecast capital position, income and liquidity. Banking authorities also use stress tests with the aim of maintaining financial system stability. Initially, interest in stress testing was largely confined to practitioners. When the global financial system was hit by turmoil due to the subprime mortgage crisis, awareness of using a stress test increased. Many experts consider stress testing as a methodology to help prepare for crises. Stress tests are essential to evaluate the relationship between macroeconomic conditions and a bank's financial condition. The first step in the assessment is an evaluation of the current health condition of the bank. Stress tests use macroeconomic indicators to develop the model. After that, forecasting is carried out, and the results are used to assess the banking system's resilience, namely its ability to absorb potential exogenous shocks. This activity aims to develop a macroeconomic stress test framework for Islamic rural banks (BPRS). This model is expected to open or start the development of other stress test models in the future. The conceptual model proposes that the components of economic growth, inflation, interest rates, and exchange rates must be the determining variables for credit risk of Islamic Rural Bank (BPRS).

DOI: https://doi.org/10.51505/IJEBMR.2023.7805