The Industrialization of Stress Tests in Banks

Stress tests are an integral instrument of risk management…

In response to the financial crisis and the ensuing enforcement of banking supervision, banks have had to carry out extensive stress tests, commencing in 2009 and most recently in 2014. The next stress test exercise has been announced by the EBA for 2016. Stress tests have become an essential component of the EBA monitoring. In addition, the importance of stress tests and simulations will significantly escalate for the internal risk management of all banks, not only for participants of the EBA stress tests (e.g. driven by MaRisk and SREP).

... the implementation of stress tests in the banks has been performed in most cases with insufficient efficiency and in a non-standardised manner

The required internal and external efforts to carry out one single stress test exercise lead to immense costs. The reasons for this are a lack of automated stress test processes, an inadequate technical infrastructure and data quality deficiencies.
The throughput times for the stress testing procedures are often several weeks instead of a few hours. Problems are not being identified and corrected at an early enough stage. Stress test results that bear a considerable time lag between the stress test date and the reporting date add little value for the internal management. If technical restrictions do not facilitate a calculation of the effects of the stress tests on a deal/transaction level, this missing optimisation of collateral security distribution may result in additional and unnecessary RWA burdens.
For some banks, inadequate risk models lead to inconsistencies in the stress test results. Thereby subsequently exacerbating even more stringent requirements on the part of the banking supervision and causing a serious increase of stressed RWA and/or stressed capital, which consequently deteriorates simulated capital ratios.
What if you could significantly reduce your costs, improve your existing solution and fulfil all of the regulatory reporting requirements in a sustainable way?
We have developed a stress test module for ABACUS/DaVinci that is based on our evolved experience stemming from numerous projects in the area of stress testing and internal risk management and from working together with our clients, as a leading European consulting company in the field of risk management and the market leader for regulatory reporting software in Germany.

The module has the following features and performance characteristics:

As a starting base it uses your regulatory reporting data and thereby facilitates a consistent calculation of your scenarios and simulations without requiring further manual adjustments.

Parameters, such as PD, LGD, CCF or market values on different dimensions (e.g. portfolio, rating and segments, individually or in combination) can be modified via an intuitive user interface. The user determines in what order the parameters will be stressed or how the parameters shall be modified, for example, in relative shifts or absolute changes.

It has a flexible interface with which you can take already stressed risk parameters such as PD, LGD or EAD from your existing risk control solutions into account at a granular level, such as for transactions or partners in the simulations.

Additionally, the module provides the opportunity to calculate default flows based on their point-in-time parameters, such as in the standard ECB stress tests.

In addition, a standardised export functionality is available to be used for further analyses and reporting.

In developing the module, on one hand we have ensured that the design is capable of handling all of the usual stress test functionalities to be taken into consideration in the area of credit/counterparty risk, fulfilling the regulatory reporting requirements of the stress tests and satisfying data management needs to the greatest possible extent. On the other hand, we have considered that some clients may prefer a maximum capability for a flexible and customisable system. Therefore, we have made provisions for client customising possibilities, so that parameters and algorithms may be adjusted to your individual requirements and requests.

If you would like to benefit from the economies of scale and the standard software maintenance service while simultaneously using the synergies between regulatory reporting requirements and risk management for your own in-house controlling, with this solution, regulatory requirements, internal stress tests and also simulations of these effects for strategic orientations (new business transactions, portfolio reduction), can be performed in an efficient and easy way.

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