Financial Stress Testing

1. STRESS MANAGEMENT
Capital Mitigating
P & L Impact RWA Impact
Impact Measures
Positive Impact
Provisions,
Interest Trade Divestment,
Rate Income, Capital,
Fees, etc
Commission
Impairment Rating
Negative Impact
Operating &
Increased Adm. Costs
Increased Net
Cost of RWA P&L
Funding Impact
Trading
Loss

2. STRESS ASSESSMENT
Capital Impact
Liabilities &
Assets
Equity
Bank Book
Default Assets
Restructuring
Loans, Debt, Wholesale
Macro Scenario
Receivables, Retail
Securitisation Inter Bank
Interest Rate
Scenario
Trade Book
Sovereign
Haircut
Real Estate Equity
Market Risk
Scenario

3. RISK MANAGEMENT
Risk Assessment
Capital
Risk Appetite ICAAP Economic Capital
Counterparty Operating Environment
Customer /
Market / Credit / Operations /
Regulatory / Insurance Risks
External Factors
Exposure
Internal Factors
Portfolio
Product
Scenarios / Sensitivity
Policies / Models
Valuation, Impairment, etc

4. STRESS TESTING MODEL
Operational Model
Integrated Risk Processes & Appetite
Stress Policy Risk Sensitivity & Scenario Definition
Business Impact - Environment & Operations
Financial Measures
Strategic & Operational Parameters
Macro Economic Reporting -
Impact of Profit & Loss A/C
Operating Balance Sheet
Conditions Stress Test Capital
Engine Liquidity
Business & Including Explain
Portfolio Factors & Assumptions
Impact Business Scenarios
Mitigating /
Risk Stress Models - Remedial
Impact Factors Model Selection
Business, Risk, Actions
& Calculation
Finance,
Valuation Criteria
Treasury
Validation &
Reconciled Risk & Finance Data Approval
Finance Infrastructure

5. STRESS TESTING CRITICAL SUCCESS FACTORS
Robust and comprehensive models, with appropriate scenarios, vetted and supported by senior stakeholders.
Senior Management uses insights derived from stress testing to address problematic business areas.
Stress testing must be embedded into the decision-making process in a consistent manner across business units and
into valuation models.
Reconciled risk, finance and treasury data must be used for stress testing accordingly.
Shortfalls in stress testing have led to a lack of credibility and limited buy-in from senior management in critical
decision making and/or taking preventative actions based on stress testing results.
Risk appetite should be embedded in business units and monitored with stress test results measured against it.
Stress results should be applied to test how the firm responds to adverse market conditions in terms of risk sensitivity
and risk management effectiveness.
Stress testing capabilities should comprise of all risk types applicable, be consistent, aggregate exposures across
product lines, businesses and legal entities, and address the secondary effects of risk in capital structure and strategy.
A challenge is to define scenarios which are useful both to the business and to the risk management function.
Behavioural assumptions must be consistently applied to gauge effects of risk events on market and credit activities.
Valuation data and associated risk measures should be consistently applied across all positions, products, operating
units, and legal entities.
Data elements must be available across all required dimensions, including risk factor hierarchies, trade data, static
data, daily valuations, sensitivity data, business entity exposures, VaR, and EaR, etc.
Prior methodologies and procedures such as Value at Risk and Economic Capital provide an overall net view of risk
making it incomplete, as they disguised the size of individual positions. Exposures were netted and reduced by hedges
and further reduced by correlations, hiding the true size of gross exposures.
Sensitivity Scenario Business & Mitigation &
Plausibility Risk Types Aggregation Financial
Factors Generation Contingency
Test Impact Plan

6. Integrated Stress Testing
• Aggregate Level
• For Decision Making
Top Down • Available On Demand
• Quick View of Position and Impact
• 80 % Accuracy
• Transaction Level
• For Reporting
Bottom Up
• Annual Exercise or Expected Event Based
• 100 % Accuracy
• All Business and Operating Units
Enterprise Wide
• All Portfolios
Risk Types • Across All Material Risk Types of the Enterprise
Embedded In • Core of the Decision Making Level of the Business
Business • Into Risk Appetite at Capital and Limit Setting Level

7. Stress Testing Framework
Directives
Policy Initiative Economic Variables
Sectoral Decomposition Credit
And
Materiality
Scenarios Severity
Counterparty
Cross Risk Effects
Concentration
Decomposition
Management Calculation Market
Of Integration
Material Risks
Analysis Operational
Test execution
Reporting
Liquidity
Capital
Approach Liquidity Funding
Operational
and
Insurance Regulatory
Resources Ratings
Margins Compliance
Capital Planning
Insurance
Business Planning
Stress Contingency Planning Reputation
Impacts Mitigation
Effectiveness Business
Triggers