Stress Testing

PrevioRisk Stress Testing module enables you to build a sound stress-testing framework adhering to regulatory requirements, including:

  • Measurement of the largest counterparty-level impacts across portfolios, material concentrations within segments of a portfolio (such as industries or regions), and relevant portfolio- and counterparty-specific trends.
  • Complete trade capture and exposure aggregation across all forms of trading (not just OTC derivatives) at the counterparty-specific level, including transactions that fall outside of the main credit system. The time frame selected for trade capture should be commensurate with the frequency with which stress tests are conducted.
  • Stress tests, at least quarterly, of principal market risk factors on an individual basis (for example, interest rates, foreign exchange, equities, credit spreads, and commodity prices) for all material counterparties. Banking organizations should be aware that some counterparties may be material on a consolidated basis, even though they may not be material on an individual legal entity basis.
  • Assessment of non-directional risks (for example, yield curve exposures and basis risks) from multi-factor stress testing scenarios. Multi-factor stress tests should, at a minimum, aim to address separate scenarios: severe economic or market events; significant decrease in broad market liquidity; and the liquidation of a large financial intermediary of the banking organization, factoring in direct and indirect consequences.
  • Consideration, at least quarterly, of stressed exposures resulting from the joint movement of exposures and related counterparty creditworthiness. This should be done at the counterparty-specific and counterparty-group (for example, industry and region) level, and in aggregate for the banking organization. When CVA methodologies are used, banking organizations should ensure that stress testing sufficiently captures additional losses from potential defaults.
  • Identification and assessment of exposure levels for certain counterparties (for example, sovereigns and municipalities), above which the banking organization may be concerned about willingness to pay.
  • Integration of CCR stress tests into firm-wide stress tests.

Reference: Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System and the Office of Thrift Supervision (June 2011). “Interagency Supervisory Guidance on Counterparty Credit Risk Management”.