Stress-testing is essential to banks and regulators. It forms the backbone of a bank’s ICAAP (Internal Capital Adequacy Assessment Process), and answers a simple question: can a bank survive extreme but plausible scenarios which adversely impact its profitability, liquidity, or capital adequacy? However, stress-testing is complicated. It requires an integrated approach that first deals with how scenarios should be selected and calibrated, and then how to translate these scenarios into their resulting financial impact whilst respecting the various interrelationships between different types of risks.

This course has been designed for practitioners who need to understand how to implement and/or improve stress-testing frameworks in their banks. Since credit risk is central to the business models of most financial institutions, the course starts by taking a deep-dive into building an evolution of PDs (probabilities of default) based on stress-scenario severity, and then translating scenario parameter values into financial impact using the staging rules of IFRS9. Stress-testing for market risk is explored using numerical illustrations of how losses arise from different exposures, including interest-rate risk in the banking book, FX exposures, equity portfolios, and bond investments. For operational risk stress-testing, the course details how to capture high-frequency low impact events as well as low-frequency high impact events; liquidity risk stress-testing explains how to link an inability to refinance funding liabilities to balance sheet weakening when credit conditions deteriorate; ESG stress-testing is also included.

The course provides significant opportunities for discussion and questions and is aided most importantly by clear illustrations, quizzes, and numerical calculations undertaken by delegates to assist in learning an array of different methodologies and techniques that can be immediately applied in practice. Attendees should expect to bring laptops and work through cases and numerical models as a key part of the course.

• Key Highlights:
  • Learn essential methodologies applied by banks for integrated stress-testing.
  • Understand techniques which translate stress-testing scenarios into their resulting impact on bank earnings, liquidity, and capital adequacy.
  • See in detail and in practice how stressed losses arise and how they are calculated for credit risk, interest rate risk in the banking book, FX exposures, equity portfolios, bond investments, and operational risk.
  • Work through hands-on, practical models using real-life examples.

Attendees should please bring with them a laptop loaded with a recent version of MS Excel. Prior to the course the course director will construct a spreadsheet that will be downloadable from the REDmoney website. This spreadsheet will contain separate tabs for each exercise featured in the course, including the integrated case study. Within those tabs will be data. For example, starting balance sheet plus stress scenarios in terms of the evolution of GDP, plus other statistics. Attendees will be required to apply the scenarios to evaluate the impact of stress for the various dimensions of risk we are studying: credit, market, operational and liquidity risk.