Stress testing has long been used in risk management but post-financial crisis regulations require more stringent stress testing programs. Banks must assess capital needs to withstand deteriorating economies or shocks. Navigant assists clients in meeting stress testing and capital planning requirements through risk identification, scenario analysis, loss projection, data quality reviews, model validation, and technology selection and implementation. Navigant's services help financial institutions improve planning, risk assessment, and regulatory reporting capabilities.

1. navigant.comF I N A N C I A L S E R V I C E S
F i n a n c i a l R i s k M a n a g e m e n t
Stress testing has long been an integral part of risk management. Prior to the recent credit
crisis, bank stress testing programs typically involved the development of scenarios that
mimicked the impact of events such as the Russian debt crisis and Long-Term Capital
Management’s failure.
Post-financial crisis, more stringent regulatory guidelines surrounding capital and liquidity
standards have necessitated a complete overhaul of bank stress testing programs. The
Dodd-Frank Wall Street Reform Act of 2010, among other mandates, requires financial
institutions to assess the capital needed in order to weather a steadily deteriorating
economy or sudden economic shock. The primary goal of the stricter stress test and capital
plan rules is to spur a significant improvement in the internal infrastructure, planning, risk,
and forecasting capabilities of financial organizations. While the requirements, at least for
the initial assessment date in March 2014, are less onerous for banks with $10 to $50 billion in
assets, the underlying principles described in greater detail below apply to all firms.
STRESS TESTING & CAPITAL PLANNING

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EXPERT GUIDANCE
FUNDAMENTAL PRINCIPLES PER THE GUIDANCE INCLUDE:
Principle 1: A banking organization’s stress testing framework should include activities and
exercises that are tailored to and sufficiently capture the banking organization’s exposures,
activities, and risks.
Principle 2: An effective stress testing framework employs multiple conceptually sound stress
testing activities and approaches.
Principle 3: An effective stress testing framework is forward-looking and flexible.
Principle 4: An organization’s stress testing environment should have a robust process for
bringing together estimates of losses and capital adequacy in relation to the organization’s
stated goals for the level and composition of capital.
Principle 5: Stress test results should be clear, actionable, and well-supported and should
inform decision-making.
Principle 6: An organization’s stress testing framework should include strong governance
and effective internal controls.
HOW NAVIGANT CAN HELP YOU
Navigant’s risk management professionals have deep expertise in the areas of credit risk,
market risk, and operations risk. We have the resources and technology needed to provide
the following services to assist our clients in meeting their stress testing and capital planning
requirements.
Risk Identification – Navigant can conduct a diagnostic review of existing processes and
provide recommendations on the purpose and scope of the stress test, data requirements,
appropriate stress testing techniques, and the technology needed for implementation.
Scenario Analysis – In addition to the stress scenarios (baseline, adverse, and severely
adverse) required by the Federal Reserve, it is important for an institution to run its own
scenarios based on the risk assessment of its portfolio. Navigant can assist in designing
scenarios that assess the amount of capital and liquidity needed to support the business
activities of financial institution such that, preferably, economic and regulatory capital and
liquidity are less than the required regulatory minimum and the difference between the
bank’s calculated amount and the required amount is minimal.

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RESULTS
Loss Projection – Navigant can assist with capturing the behavioral characteristics of the
loan portfolio so that asset-level losses are modeled accurately. Additionally, Navigant can
facilitate the integration of asset-level loss projections into net interest income projections.
Data Warehouse / Data Quality /Integrity – Navigant has deep expertise in data readiness
review. Different business units within an organization have different ways of capturing
data. Therefore, it is very important to have a thorough understanding of data quality issues
and any data gaps that may exist before conducting stress tests. As a specific example,
Navigant is very well-versed in different ALM systems (which may be used to create a
pro-forma income statement) and will ensure consistent inputs from the credit, finance,
and other risk functions of the bank are being used. Enhancing data sourcing and storing
capabilities where necessary is also our core competency.
Model Validation – To comply with regulatory requirements, all high risk models of a financial
institution must be independently validated. Navigant has deep expertise in modeling
applications used in all areas of risk management and we have helped set up model
validation policies and procedures at various financial institutions.
Technology – Stress testing is not a one-time exercise. Proper processes and automation
must be in place in order to meet the periodic requirements emphasized by regulatory
guidance. Some institutions choose to utilize third party tools to conduct stress testing. In the
event an institution is inclined towards utilizing third party tools, a proper vendor selection
process as well as robust implementation is needed. Navigant can assist by providing
support in the following areas:
»» Vendor Selection Process
»» Business Requirements Development
»» User Acceptance Testing
»» Project Management

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KEY STEPS OF A BANK STRESS TESTING PROGRAM:
PLANNING
CREDIT RISK
ANALYSIS
PPNR
LIQUIDITY &
OPERATIONAL RISKS
SCENARIO BUILDER
CAPITAL
ALLOCATION
REGULATORY
REPORTING
»» Senior Management Involvement
»» Data Gathering & Fill-in Gaps
»» Roles & Responsibiliites
»» Documentation & Governance
»» Appropriate Set of Market Data
»» Develop Scenarios
»» Economical & Historical
Relationship Analysis
»» Parameterized Scenarios
»» Estimate Loan Loss Across All Assets
»» OTTI Analysis
»» Pro-Forma Balance Sheet
»» Pro-Forma Income Statement
»» Other Losses Including Ops Risk
»» Charge-Off & ALLL
»» Forecast Capital Position
»» Transparent Contingency Plan
»» Calculate NIR & NIE
»» Populate Regulatory Report
»» Reconcile & Evaluate the Results
ABOUT NAVIGANT
Navigant (NYSE: NCI) is a specialized, global expert services firm dedicated to assisting
clients in creating and protecting value in the face of critical business risks and
opportunities. Through senior level engagement with clients, Navigant professionals
combine technical expertise in Disputes and Investigations, Economics, Financial
Advisory and Management Consulting, with business pragmatism in the highly regulated
Construction, Energy, Financial Services and Healthcare industries to support clients in
addressing their most critical business needs. More information about Navigant can be
found at navigant.com.
CONTACT
SUDIP CHATTERJEE
Director
646.2227.4301
sudip.chatterjee@ncacf.com
RAMAN MANDAPAKA
Director
202.973.6572
raman.mandapaka@navigant.com
PAUL NORING
Managing Director
202.973.6550
pnoring@navigant.com
TARIQ HUSSAIN
Director
312.583.2133
tariq.hussain@navigant.com