Description of Bayesian Model Averaging Approach For Stress Test Satellite Models

August 2014
Marco Gross

This box describes the general top-down satellite model design procedure applied in the ECB solvency analysis framework. It is widely applicable across the various forms of risks that banks face. Specifically, the satellite model design module is applied to credit risk, to interest rate risk and to other types of market risk (e.g. affecting the trading portfolio). Concretely, a satellite equation is used to translate an assumed scenario (baseline or adverse) into a path for the dependent variable that captures some risk pertaining to a bank’s balance sheets.