Stress Testing

Question 1

What is the role of senior management with regard to stress testing?

Answer 1

Senior management is accountable for implementing the program and ensuring the institution has adequate plans to deal with plausible stress scenarios.

Question 2

Name the 4 main purposes of stress testing

Answer 2

1. Risk identification and risk control
2. Complementary perspective to other tools
3. Support capital management
4. Improving liquidity management

Question 3

Name 4 general considerations when you want to do stress testing for a firm.

Answer 3

1. Variety of perspectives and techniques
2. Well documented
3. Stress testing infrastructure should be robust, but also flexible
4. Updated and reevaluated regularly

Question 4

What are types of measures that are used in a stress testing infrastructure to assess the financial state of a firm?

Answer 4

• Asset and Liability values
• Level of impaired assets and write-offs
• Accounting profit and loss
• Economic profit and loss
• Required and available regulatory capital
• Economic capital
• Liquidity and funding gaps

Question 5

Why is it important to be creative when developing stress testing scenarios?

Answer 5

It is important to see the relations between markets and events to not underestimate the impacts on the financial state of the institution. One needs to be able to guess any “Domino effect” coming from a change in financial markets

Question 6

Some areas in the process of stress testing have proven to require some specific focus, what are them?

Answer 6

• Risk Mitigation
• Securitization and Warehousing Risks
• Risks to Reputation
• Counterparty Credit Risk
• Risk Concentrations