Modern Scenario Analysis

Ariane Chapelle

As one of the four pillars of the advanced measurement approach, scenario analysis is a major compliance exercise, but it should be much more than this. In times of volatility and uncertain competitive, regulatory and technological environments, scenarios are an important way to assess business resilience.

Just as risk identification is the first step of risk management, scenario identification is the first step of scenario analysis. Forget the ready-made lists from industry think-tanks and external providers, at least in the first instance. These lists are useful, but are no more than a common base: business continuity, data theft, cyber attacks, natural disasters, regulatory breaches, mis-selling, rogue trading... Sounds familiar? Of course it does. Everybody has the same list.

Alongside industry scenarios, firm-specific scenarios are most useful for senior management to detect and prevent potential shocks driven by internal factors. Identifying these idiosyncratic scenarios requires considering two structural risk drivers to a business: exposures and vulnerabilities.

Exposures are inherent to a firm’s business; they are its main clients, key distribution channels