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Integrated Stress Testing Solution
ACS were engaged to develop an integrated stress testing solution for a Tier 1 UK retail and wholesale bank.
Consideration
- Centrally administered stress testing function.
- Stress tests aligned with Bank’s risk policy and regulatory requirement.
- Top Down stress test model to be available for business operations decisions.
- Integrate various stress tests across risk types.
- Availability of accepted and agreed common data used for stress tests.
Solution Design
- The approach was to organise the stress testing effort so as to require minimum overlap with other risk functions, be centrally administered and comply with the Bank’s risk policy.
- Develop a stress test policy for the Bank comprising the sum of its retail and wholesale operations.
- Define integrated stress testing to include top down, bottom up, enterprise wide, across all major risk types and embedded in business operations.
- Develop a central stress test engine to run tests which consolidated financial measures and business scenarios.
- Define data to be used for stress testing and usage policies including creation of a specific reconciled data warehouse.
- Define finance infrastructure to support the data required – transactions and accounting data.
- Define risk specific data requirements.
- Develop impairment, capital, profitability and liquidity models for stress tests.
- Define model selection criteria and calculation methods.
- Define reporting requirements for management, business operations, regulatory and rating agencies.
Realised Benefits
- Satisfy regulatory requirements.
- Enable management to plan for contingency scenarios.
- Make appropriate credit and capital allocation decisions.
- Manage enterprise risk better.
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Krishan Gopal
Principal Consultant Credit and Market Risk
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