A short review of stress testing regulatory frameworks.
Stress testing is evaluating the impact of large, expected as well as unexpected shocks on a bank’s capital. With the global financial crisis of 2008, EU debt crisis, Libor scandal and rampant rogue trading, it has become vital to judge a financial institution’s strength in coping with large [...]
Tag Archives: Stress Testing
Two new online video based courses that cover the topics of Asset Liability Management (ALM), Capital Adequacy and Stress Testing at an intermediate level. The Stress Testing, ALM & Capital Adequacy Crash Course includes over 500 minutes of video instruction, while the shorter ALM & Capital Adequacy course covers the basics of both topics in under 150 minutes.
Stress testing refers to a process through we which we try and assess the impact of abnormal and extreme conditions on our processes, control systems and organizations.
Within financial services stress testing takes a second dimension where the focus shifts from assessing impact to identifying breaking points; the maximum amount of stress a financial institution would be able to bear before it breaks down and fails. The level of interconnectivity between financial markets and institutions has made this threshold of failure even more important since a since the failure of a single institution can trigger a deep and painful system wide crisis that can very easily turn into a regional or global contagion.
Earnings-at-Risk (EAR) is computed in order to evaluate the impact of interest rate change on earnings. The approach used is a VaR based approach that takes into account non-parallel shifts in the term structure and its impact on the earnings portfolio of the bank. The balance sheet items to be included in the calculation are [...]
Fall in market value of equity (MVE) depicts a change in the market value of equity due to changes in market values of assets and liabilities. The respective change in assets and liabilities is computed from the interest rate shock derived, based on the value at risk (VaR) approach.
Step 1: Determine look back period
Determine the [...]
This advanced level workshop serves as a refresher to liquidity management, with an emphasis on traditional models including gap analysis and earnings at risk, stress testing, scenario planning, policy making and simulations.
Basel III seeks to enhance the Basel II framework by addressing both firm-specific risk as well as system-specific systemic risk factors. Here, we will discuss some of major improvements being made to the Basel II framework on a macro-prudential system-wide basis as well as the greater role that stress testing will play in the process.
We cover some of the ways in which liquidity risk may be stress tested under the Internal Capital Adequacy and Assessment Process (ICAAP). These involve simple sensitivity analysis techniques, such as applying liquidity and interest rate shocks to the assets and liabilities of the bank.
A look at how stress test shocks are applied to various elements of the profitability analysis to determine their impacts on the profitability of the bank’s loan portfolio.
In this post we discuss one way of stress testing a rating grades transition matrix. The stressed transition matrix will then be used in the other credit risk quantification calculations. The revised results will be compared to the original credit risk quantification calculations to determine the impact of the stress test.
