Credit Risk Stress testing allows organisations to evaluate the robustness of their models to adverse environments, including identification and quantification of key emerging risks.
Stress testing is a key area of regulatory scrutiny and focus is increasingly moving towards the embedding of models in the day to day running of the organisation.
It is also necessary to meet regulatory requirements such as ICAAP and or IRB organisations, stress testing is a key explicit requirement in Capital Requirements Regulations (CRR) and Supervisory Statement (SS) 11/13.
From a business perspective, stress testing should enable an organisation to take on risk with a greater degree of certainty of the potential outcomes and design appropriate mitigation in advance.
The introduction of IFRS 9 impairment calculations has seen stress testing methodologies adapt in two key areas:
- Embedding the capability to accurately simulate the IFRS 9 model behaviour in adverse stress scenarios
- Utilisation of the capabilities developed for IFRS 9 to directly influence the stress test development. This allows consistency across the organisation and an efficient cost-effective stress testing development.
We have undertaken stress testing developments, designs and validations for several clients across all portfolios and asset classes.
Our stress testing developments are tailored to the client’s requirements, allowing full customisation to the portfolio behaviour, IFRS 9 model methodology and RWA.
In addition, we can develop front end functionality including ‘point and click’ sandbox interfaces and back end reporting requirements that are also tailored to each client’s requirements.
As well as developing stress testing models, we offer support with the embedding and governance of stress testing across the organisation including:
- Business review of all areas where stress testing should be considered e.g. Return on Equity, forecasting, capacity planning, risk appetite
- Development of usage process for all areas and information flow
- Development of a mitigating action process and subsequent quantification methodology
- Development of monitoring frameworks and policy documents.