Our framework sets out three steps (Figure 1): 1.  identifying financial system vulnerabilities;  2.  developing risk scenarios; and  3.  assessing each risk scenario by determining the probability of it occurring, as well as its impact should it occur. The first step is identifying vulnerabilities, which are conditions that could amplify and propagate shocks throughout the financial system.
Examples of potential vulnerabilities include high levels of indebtedness or leverage, liquidity and maturity mismatches, and the mispricing of assets. In contrast, risks are events or outcomes that could threaten the ability of the financial system to perform its core functions. Risks materialize when trigger events – which are adverse shocks such as the recent dramatic drop in oil prices – interact with vulnerabilities.