Financial Institution Perspectives on the Evolving Role of Enterprise-wide Stress Testing
Andy McGee and Ilya Khaykin
Financial Institution Perspectives on the Evolving Role of Enterprise-wide Stress Testing
Introduction
CCAR and Stress Testing as Complementary Supervisory Tools
Financial Institution Perspectives on the Evolving Role of Enterprise-wide Stress Testing
The Advancement of Stress Testing at Banks
Designing Macroeconomic Scenarios for Stress Testing
Determining the Severity of Macroeconomic Stress Scenarios
Data, Analytics and Reporting Requirements: Challenges and Solutions
A Multi-view Model Framework for Stress Testing C&I Portfolios
Stress Testing Credit Losses for Commercial Real Estate Loan Portfolios
Stress Testing and Retail Portfolios
Market and Counterparty Risk Stress Test
On Operational Risk Stress Testing
Quantitative PPNR Modelling
Banks’ Governance and Controls over Internal Capital Adequacy Processes
CCAR and Capital Management: Relationship with Economic Capital, Regulatory Capital and ICAAP
EU-wide Stress Test Versus SCAP and CCAR: Region-wide and Global Perspectives
Enterprise-wide stress testing,11Enterprise-wide stress testing is a process that a financial firm uses to explore the impact of economic scenarios on its financial condition over multiple periods, typically using regulatory capital metrics. The impact is estimated for all businesses and risks, using models that link financial performance to macroeconomic or other factors. In capital adequacy assessment, the “test” is typically whether the institution retains sufficient capital to remain a going concern at the worst point of the forecasted period. as a formal discipline for risk and capital management, was born out of the financial crisis. Stress tests had previously been carried out for certain types of risk or for specific portfolios, but rarely for all the risks faced by an entire enterprise. For example, market risk stress testing was widely adopted in the 1990s to supplement value-at-risk (VaR) measures, whose calculation tends to underestimate extreme losses. While these narrow stress tests were useful for managing specific risks or portfolios, they shed little light on the overall effect that a “stress event” would have on an institution.
During the 2000s, some institutions
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