Stress Testing, Basel III and Reverse Stress Testing

Venues, Dates & Cost

For Whom

• Senior Management
• Heads of Risk, Audit, & Compliance
• Risk Managers, Audit Managers, & Compliance Managers
• Executive & Non-executive Directors of the Boards
• Managers tasked with implementing ICAAP and risk management professionals

Module 1 – Stress Testing Under the New Regulatory Dispensation

• Recap of BIS Paper (BCBS155) – Principles for sound stress testing practices and supervision (May 2009)
  • Introduction
  • Performance of stress testing during the crisis
  • Use of stress testing and integration in risk governance
  • Stress testing methodologies
  • Scenario selection
  • Stress testing of specific risks and products
  • Changes in stress testing practices since the outbreak of the crisis
  • Principles for sound stress testing practices and supervision
  • Principles for banks
  • Specific areas of focus
  • Principles for supervisors

Module 2 – Approaches to Stress Testing

• Key elements
  • Backdrop
  • Review of key risk measures
  • What is stress testing?
  • Why stress testing (Supervisory & banks’ expectations)
  • Stress Test – External Drivers
  • Stress Test – Internal Drivers
  • Case Studies: Examples/Illustrations
  • Sound practices & Best practices
  • Stress event definition
  • Calculate resulting loss and/or capital/funding/liquidity needs
  • Management action

Module 3 – Scenario Definition & Demonstrations

• Scenarios and assumptions
  • Model assumptions & choice of scenario
  • Depth & breadth of stress test methods
  • Choosing scenarios
  • Context under which risk is managed
  • Normal assumptions, normal markets, seasonal-and cyclical stress, semi-and quasi catastrophic scenarios
  • Examples

Module 4 – Practical Stress Testing Approaches & Applications to Economic Capital

• Applications
  • Difficulties & challenges
  • Putting it altogether
  • A suggested roadmap to establish a consistent bank-wide framework
  • Application to economic capital calculation and allocation
  • Managing risk with stress tests
  • Communicating extreme events/reverse stress test
  • Reducing damage of potential worst case scenarios
  • Integrating stress testing into risk management policy
  • Interpretation of the results of stress test
  • Reporting
  • Contingency planning

Module 5 – Aggregate/Integrated & Reverse Stress Test

• Reverse stress testing concepts
  • What is a reverse stress test?
  • Challenges & limitations
  • How might risk managers use reverse stress tests?
  • How might central banks and financial regulators use reverse stress test?
  • Data Requirements
  • Information coverage
  • Coverage of businesses
  • Choice of Local vs. Global Economic Conditions
  • Liquidity & Contagion Stress Test
  • Living Wills & Resolution Planning
  • Examples

Module 6 – Methodology of Reverse Stress Tests

• Framework and methodology
  • Basel III implications: Holistic risk types and coverage
  • Liquidity and funding constraints and behaviour in stressed times
  • Scenario analysis
  • Common liquidity metrics and cash flow projections
  • Cash availability and needs: Scenario-specific
  • Case studies: Factors driving historical and hypothetical scenarios
  • Limitations to the potential usefulness of reverse stress tests
  • Market dynamics in times of stress & magnitude of stress
  • Creating a systematic stress testing framework
  • Analysing the portfolio to determine sources of risk and optimize the number of factors to stress test
  • Optimizing the number of stress tests performed on the portfolio modelling of portfolio credit risk
  • Establishing a schedule for reviewing assumptions and stress testing techniques
  • Coordinating the stress testing framework with VaR analysis and limitations
  • Example

Module 7 – Best Practices in Stress Testing & Threshold Modelling

• Best practices
  • Scenarios based on default events and appropriateness
  • Consistent stress testing on a portfolio level based on factor model scenarios
  • Capital and expected losses under stress
  • Integration of market and credit stress test scenarios
  • Incorporation of macroeconomic scenarios into stress testing
  • Examples
  • Difficulties and challenges
  • Exposure and/or cash flow assessment
  • ALM Considerations
  • LCR and Beyond
  • Stress test Results: Which will be trivial, which meaningful?
  • Roles and responsibilities
  • Implications on ICAAP
  • Frequency of calculations
  • Review of stress testing scenarios and methodology
  • Supporting documentation
  • Stress Testing Scenarios
  • Stress Testing Methodology
  • Default Fund/Capital Buffer Policy
  • Default/Living Will Process, Resolution Planning and Procedures