In This Issue Stress Testing the Czech Banking System Martin Čihák (on Page 2) Estimating Credit Risk under Macroeconomic Fluctuations Bank Failures and Inefficient Cost Management

Central banks have been faced with many conceptual challenges in the course of ensuring financial system stability. The list of problems includes the ability to predict the likelihood and severity of financial crises, the optimum level of prudential capital requirements, and the early detection of the risk of individual bank failure. This issue of the Bulletin highlights the results of analyses of the Czech banking sector's ability to withstand various economic shocks (M. Čihák), the bank capital requirements generated by various approaches to risky debt evaluation (A. Derviz), and the extent and consequences of inefficient cost management in banks (A. Podpiera). This in-house economic research made a major contribution to the first Financial Stability Report published by the CNB in January 2005.