OSFI.Stress

Question 1

risk identification/control

Answer 1

• identify concentrations & interactions of risks

- adjust individual portfolios & overall business strategy

Question 2

complementing other tools

Answer 2

• test stat models used to determine VaR

- simulate shocks to test model robustness to economic changes

Question 3

supporting capital management

Answer 3

• identify SEVERE events and/or COMPOUNDING events that impact capital requirements

Question 4

improve liquidity management

Answer 4

• ASSESS liquidity profile & adequacy of buffer FOR institutional & market-wide stresses

Question 5

describe how stress-testing is a key risk management tool for coverage of overland flooding

Answer 5

• company won’t have historical data:
• -> identify flood risks using stress-testing models
• -> estimate capital required to support flood risk in diff scenarios
• -> stress-testing could complement publicly available flood data

Question 6

board responsibilities regarding the program

Answer 6

• ultimate responsibility for program
• ensures implementation of program by management
• should be aware of key findings

Question 7

management responsibilities of program

Answer 7

• implement & manage stress-testing program
• identify PAS
• develop & implement risk mitigation strategies

Question 8

general considerations (RUDI)

Answer 8

• Range of perspective, techniques
  
  • -> perspectives: consult economists, actuaries, other
• -> techniques: qualitative, quantitative
• Update stress-testing framework regularly
• -> monitor effectiveness of framework with qualitative, quantitative measures & update accordingly
• -> elements of a framework include: docs, data quality, assumptions…
• DOCS
• -> provide written docs of assumptions & fundamental elements of scenarios
• Infrastructure (should be flexible)
• -> should allow increase in sensitivity testing in times of rapid change
• -> should accommodate time horizons for management action

Question 9

considerations in scenario selection

Answer 9

• should cover all important business & product lines
• create NON-HISTORICAL scenarios (events that haven’t happened but COULD happen)
• severe & sustained DOWNTURNS (includes large losses, loss of reputation, legal problems.. )

Question 10

focus areas in response to financial market turmoil

Answer 10

• risk mitigation
• S&W (securitization & warehousing)
• reputational risk
• credit risk & counter-party risk
• concentration risk

Question 11

OSFI’s considerations in assessing stress-test program

Answer 11

APPROPRIATENESS
- are scenarios appropriate for institution’s risk profile
VIABILITY
- are scenarios included that compromise viability
FREQUENCY
- is stress-testing frequent enough for timely management action
SEVERE SHOCKS
- do scenarios include severe shocks & sustained downturns

Question 12

compare & contrast scenario with sensitivity testing

Answer 12

Scenario Testing
- significant changes to risk factors
- observe future state including ripple effects & management actions over a longer time horizon
- more complex & comprehensive
Sensitivity Testing
- incremental changes to risk factors
- shock is more immediate & time horizon shorter
- simpler fewer resources required