Stress and Scenario Testing by Edu Pristine

Author of lecture Stress and Scenario Testing

Edu Pristine

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... Demonstrate an understanding of the processes involved in SCAP loss and resource projections. Demonstrate an understanding of the SCAP capital buffer. Describe the calculation of additional capital to build a SCAP buffer. Identify the indicated additional capital buffer under ...

... Macro-prudential goal – help reduce likelyhood of a worse economic outcome –Investor and counterparty confidence would be generated due to less uncertainty about banking sector health –BHCs would be more willing to lend as they would be infused with capital to absorb possible future losses ...

... their capital planning stress testing –Introduce reverse stress testing. Reverse Stress testing requires firms to consider the scenarios most likely to cause their current business model to become unviable. This information will help firms to understand the relevant risks and manage them appropriately. FSA’s integrated approach to stress testing ...

... and composition (amount) of capital was assessed –Tier 1 capital – Common Equity and certain types of Preferred Equity –Buffer should be enough to absorb losses in adverse conditions and ...

... non-interest income minus non-interest expense –Resources available from the allowance for loan and lease losses (ALLL). These estimates were reviewed and analyzed by supervisors and then evaluated against independent benchmarks developed by supervisors to arrive at the supervisors’ loss estimates. The loss and resource estimates were supposed to –Reflect the risk and business lines of each BHC –Be consistent with the macroeconomic environment specified ...

... enough to absorb losses in adverse conditions and meet capital target ratios. Tier 1 Capital / Risk-Weighted Assets > 6%. Tier 1 Common capital / Risk-Weighted Assets > 4% 7-May-20099-Nov-2009 Baseline ScenarioMore Adverse Scenario ...

... change to retained earnings were allocated to an after tax portion and a tax related portion using a 35 percent average tax rate. The tax?related portion of any losses was applied to the stock of total deferred tax assets to estimate the pro forma value, in accordance with existing capital rules. Finally, after tax changes to retained earnings were combined with ...

... resources to absorb losses of $360 B –Net capital buffer need of $185 B, $75 B after capital actions, BHC-specific results –10 BHCs ...

... Express BB&T Bank of NY Mellon Capital One Goldman Sachs JPMorgan Chase MetLife State Street US Bancorp Identified ...

... at default and loss given default data, which varies with the economic cycle. The potential, more generally, for future outcomes to different from past outcomes even where historic data is plentiful –As part IRB quantification, FSA expect firms to use stress testing routinely ...

... testing policies: Financials should be projected over a 3 to 5 years period to estimate capital resources and buffer throughout an economic and business cycle. A firm’s submission should show an analysis ...

... The turmoil has revealed serious flaws in stress testing methodologies based on historical risk models. Scenario selection: Most of the stress tests did not have scenarios to capture extreme market situations such as those that occurred during the financial crisis...

... senior management. Board and senior management involvement in the stress testing program is essential for its effective operation. A bank should operate a stress testing program that promotes risk identification and control; provides a complementary risk perspective to other risk management tools; improves capital and liquidity management; and enhances internal and external communication. Stress testing programs should take account of views from across the organization and should cover a range of perspectives and techniques....

... be systematically challenged. The stress testing program should explicitly cover complex and bespoke products such as securitized exposures. Stress tests for securitized assets should consider the underlying assets, their exposure to systematic market factors, relevant contractual arrangements and embedded triggers, and the impact of leverage, particularly as it relates to the subordination level in the issue structure. The stress testing program should cover pipeline and warehousing risks. A bank should include such exposures in its ...

... stress tests are not adequately taken into consideration in the decision-making process.Supervisors should assess and if necessary challenge the scope and severity of firm-wide scenarios. Supervisors may ask banks to perform sensitivity analysis with respect to specific portfolios or parameters, use specific scenarios or to evaluate scenarios under which their viability is threatened (reverse stress testing scenarios)....