Integrated Credit Risk Stress Testing

Integrated Stress Testing and ICAAP platform (IST AND ICAAP) allows the efficient evaluation (real time) of multiple business and macroeconomic scenarios (including credit risk stress scenarios) by performing the corresponding detailed forward-looking financial projections of impairments, RWA, and corresponding impact on P&L, BS, capital availability.  Integrated Credit Risk Stress Testing and ICAAP software permits a holistic view with financial planning, strategy evaluation, and risk measurement. Contact The Analytics Boutique for a demo.

Historically, credit stress testing has been done in silos by the different business units, asset classes, departments… Too frequently, credit stress testing is performed based on inefficient manual processes using spreadsheets. Problems are long response times, duplications, inconsistency in data sources/dates and methodologies, manual errors and not a comprehensive view of the impact of each scenario into revenues and/or customer behaviour. Financial Institutions need an integrated process for credit stress testing since most activities are similar across departments, asset classes…

Integrated Stress Testing and ICAAP platform represents a breakthrough permitting a much faster response time which leads to more effective integration of credit risk stress testing into the strategic daily management of the institution. These benefits are achieved as follows:

  • Based on inputs of actuals data, Integrated Stress Testing and ICAAP system projects a detailed view of the group level and BU level for both performing and non-performing credit exposures:
    • Balances and exposures for on-and off-balance sheet products
    • Risk weighted assets (RWAs)
    • Impairment (IFRS 9 expected credit losses, including breakdown of stages 1-3)
    • Regulatory expected losses (if applicable)
    • Economic capital
    • IRRBB
    • Pilar II risks (concentration, reputational, strategic and other risks)
  • Integrated Stress Testing and ICAAP solution permits to complement the above analysis with the following analysis:
    • P&L: Pre-provision net income in consideration of the impact of impairments on interest income, etc.
    • Balance sheets with required drilled down on asset classes
    • Funding structure
    • Liquidity analysis (LCR, liquidity horizon and NCCF)
    • Dividend policy and available capital
    • Ratio for performance analysis
  • Integrated Stress Testing and ICAAP software accepts an unlimited number of user-defined external risk factors/variables to project financial statements in an integrated manner:
    • Macroeconomic (GDP, Unemployment, HPI…),
    • Financial/market risk (Interest Rates, FX, spreads…),
    • Business (volumes, spreads, operating costs…),
    • Customer behaviour (behavioural at maturity i.e. prepayments, product transition…)
    • Hedging structure (swaps and derivatives)
    • Regulatory (coefficient changes, regulatory capital formulation …),
    • Other
  • Integrated Stress Testing and ICAAP system integrates existing macroeconomic, financial and credit models (PD, LGD, CCF…) in the institution including their model governance. Using such models, projects forward-looking (quarterly, annually, 3 years, 5 years,…,) all risk variables derived from the scenarios and models such as PDs, LGDs, CCFs, RWAs, impairments, etc, including risk appetite

    Financial and credit macroeconomic models are integrated in credit risk stress testing calculations
    Financial and credit macroeconomic models are integrated in credit risk stress testing calculations
  • Integrated Stress Testing and ICAAP software permits the definition of scenarios based on risk factors affecting business, finance, risk delivering a consistent and integrated view of the impact of the credit stress scenario across in the entire organization: reduction in GDP growth; Increase in central bank rate change forecast; Brexit shock – Fall in CCY, weaker exports due to trade barriers, rise in unemployment; regional and sectorial stresses

Scenario definition with variables audit trail in Integrated Credit Risk Stress Testing system
Scenario definition with variables audit trail in Integrated Stress Testing and ICAAP  system

Configurable output of integrated stress testing calculations of P&L, BS, Capital and performance projections over the next 6 years in Integrated Credit Risk Stress Testing system
Configurable output of integrated stress testing calculations of P&L, BS, Capital and performance projections over the next 6 years in Integrated Stress Testing and ICAAP solution.

  • It allows impact analyses/‘what if’ scenarios and ad hoc stress testing in an interactive way.
  • It gives a more dynamic view on B/S and P&L gaining understanding of trade-offs.
  • Integrated Stress Testing and ICAAP software increases transparency on the impact of management decisions/actions on the balance sheet, P&L and key regulatory/financial ratios.
  • Integrated Stress Testing and ICAAP system provides views for different audiences: detailed drilldown on financial items or high-level dash-board.

  • Manages multiple users who access via web, with different roles and permissions: administration, data loaders, restricted users, read only, or general user.
  • Integrated Stress Testing and ICAAP software system permits a full customization of institutions business units, products, items, ratios, reports, …as needed.
  • Integrated Stress Testing and ICAAP system system allows a real time integration into daily management thanks to instance response

In summary, Integrated Stress Testing and ICAAP solution system allows the evaluation of the impact of the institution’s strategy into the credit risk-related metrics and ICAAP and affected P&L and BS ratios by accommodating existing business, macroeconomic and risk forces, in an efficient and user-friendly way providing access, via web, to multiple types of users.

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