Stress testing is part of a financial institutions’ own risk management which provides insight into capitalization health thereby assisting with the design and deployment of countermeasures for addressing potential shortfalls as well as being a toolkit for regulators. Stress testing provides an opportunity to identify potential vulnerabilities in hypothetical adverse conditions.

This course discusses recent developments in stress testing methodologies and financial stability analysis for banks, insurance companies and mutual funds. It gives participants the opportunity to learn and apply new tools used for purposes of stress testing and systemic risk analysis. New, emerging topics in stress testing, such as feedback loops between real and financial sectors etc. are also covered.

This course also reviews stress testing objectives, methodologies, techniques, and good practices. Much of the course consists of hands-on modules that expose participants to the entire stress testing cycle: from entering data and estimating macro-financial models to designing scenarios, selecting assumptions, running tests, integrating feedback loops between financial and real sectors, communicating the results, and incorporating them in policy decision making, for example, by informing the calibration of capital and liquidity buffers.

Pre-requisite

• Good understanding of Ms. Excel
• Good understanding of the guidance of IFRS 9

Summarized Course Outline

• Introduction
  • What is stress-testing – capital vs liquidity stress-testing?
  • Sensitivity Analysis, Scenario Analysis and Stress testing
  • History of stress testing
  • Motivation for stress-testing – internal vs external supervisory and external investor purposes; business-as-usual vs stressed conditions; bottom-up vs top-down
  • Role of stress-testing in Internal Capital Adequacy and Assessment Process (ICAAP), Supervisory Review and Evaluation Procedure (SREP), as well as in business planning
  • Sensitivity Analysis, Scenario Analysis and Stress testing
• Test Model
  • Understanding and modeling operating profits
  • Understanding and modeling ECL allowance
  • Understanding and modeling the statement of financial position
  • Understanding and modeling regulatory capital
• Stress testing:
  • Stress testing of credit risk
  • Stress testing of liquidity risk
  • Stress testing of other risks
  • Practice of stress testing
• Performing The Capital Stress Test
  • Stress scenario construction and choice of stressed capital threshold
  • Segmenting the loan portfolio
  • Peer benchmarking: Linking macroeconomic and bank-level variables.
  • Econometric techniques for stress testing
  • Stressing loan loss provisions