C - OSFI Stress Testing

Question 1

OSFI STRESS TESTING

4 general considerations for stress testing programs

Answer 1

1) ACCOUNT FOR VIEWS FROM EXPERTS ACROSS THE ORGANIZATION
2) DOCUMENTED appropriately in a PROCEDURE governing the stress testing program
3) ROBUST INFRASTRUCTURE, but FLEXIBLE ENOUGH for evolving stress test.
4) Regularly UPDATE STRESS TESTING FRAMEWORK. Effectiveness assessed REGULARLY AND INDEPENDENTLY.

Question 2

OSFI STRESS TESTING

When reverse stress test prove to be useful

Answer 2

to uncover HIDDEN RISK and INTERACTIONS among risks

Question 3

OSFI STRESS TESTING

4 elements OSFI may want to assess in cie’s stress testing programs (as per of the Supervisory Review Process)

Answer 3

1) whether chosen scenarios are consistent with risk appetite
2) whether chosen scenarios are appropriate to portfolio of cie and if they include severe shock factors
3) whether frequency of stress testing is sufficient to support timely management action.
4) assess future capital RESSOURSES and capital REQUIREMENTS under adverse scenarios

Question 4

OSFI STRESS TESTING

How a stress testing program can provide a different risk perspective than other RM tools

Answer 4

• provide insight on validity of other stat models at high confidence intervals (VaR)
• assess robustness of models to changes in financial environment
• detect hidden concentrations and interactions overlooked by other models