Balance-Sheet Projection

Ahraz Sheikh

12.1 INTRODUCTION

This chapter describes balance-sheet projection for use in the generalised risk modelling framework developed over the course of this book. This brings together the cashflow forecasts developed in Part III, and is analogous to the aggregation of loss/cashflow distributions for economic capital and stress testing, developed in Part I.

This section first recaps the development of the generalised risk modelling framework. Part I described the construction of the framework for economic capital and stress testing purposes. The aim of the framework then was to obtain the loss/cashflow distributions for the core material risks. The framework was shown to consist of a risk factor model, a parameter model and a loss/cashflow model. This structure allows the relationship between the economy and cashflows to be determined. The trajectory of losses can be estimated across scenarios and allows the effects of adverse scenarios to be estimated for stress testing purposes (Chapter 4). Alternatively, economic capital demand could be estimated by building a distribution of losses or cashflows over a range of economic scenarios, weighted by their probability of occurrence. This

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