Bank Stress Testing

An in-depth workshop on bank capital stress testing, applying both econometric and fundamental stress models to the major retail and corporate banking credit risks, as well as stressing market and operational risks.

The stress testing models that are developed during the course can be used for banks’ Pillar 2 Internal Capital Adequacy Assessment Process (ICAAP) and Supervisory Review and Evaluation Process (SREP), as well as for external, supervisor-driven and investor-driven stress tests.

Throughout the programme participants develop the different modules of a stress test of a large bank, culminating in a complete stress test model. Case studies explore various approaches from a number of European, US and Asian banks.  

• Stress testing staff at banks
• Capital management staff
• Treasury/ALCO staff
• Quants
• Risk management staff
• Senior management
• Bank supervisors and resolution authorities
• Bank equity and credit analysts and portfolio managers

• Build a complete bank capital stress test model, encompassing both econometric and fundamental models of retail and corporate credit risk, market risk and operational risk
• Learn how to apply the model for any of Internal Capital Adequacy Assessment Process (ICAAP), external supervisor-driven stress tests or investor-driven stress tests
• Review the various approaches taken by different banks and supervisors in their capital stress testing, from a range of European, US and Asian banks

• Basic understanding of financial statements
• Familiarity with Microsoft Excel

Stress Testing Motivation And Applications

• What is stress testing – capital vs liquidity stress testing?
• Motivation for stress testing – internal vs external supervisory and external investor purposes; business-as-usual vs stressed conditions; bottom-up vs top-down
• Stress tests as a comprehensive and fully integrated, quantitative health assessment of banks as distinct from partial CAMEL-based approaches
• Role of stress testing in Internal Capital Adequacy and Assessment Process (ICAAP), Supervisory Review and Evaluation Procedure (SREP) and setting of Pillar 2 capital requirements, as well as in business planning
• Banking system-wide stress tests, both in business-as-usual and stressed conditions. The increased role of external stress tests post crisis

Stress Test Model Building Blocks

• Understanding and modelling pre-provision operating profits
• Understanding loan loss and other asset provisioning
• Understanding and modelling the balance sheet
• Understanding and modelling regulatory capital
• Linking the income statement, balance sheet and regulatory capital models

Case Study: Setting up the stress test model for Lloyds Banking Group Plc

Loan Loss Provisioning

• Non-performing exposure and forbearance loan definitions – threshold criteria; entry and exit; borrower group perimeter. Definitional differences across banks
• Understanding loan losses – loan loss provisions, loan loss reserves, write-offs and recoveries
• Loan loss provisioning under IAS 39 vs IFRS 9 – moving from an incurred loss model to an expected credit loss model

Case Study: Loan loss provisioning at Lloyds Banking Group Plc

Workshop 1: Setting up the stress test model for Banco Santander SA

Performing The Capital Stress Test – Retail Lending

• Stress scenario construction and choice of stressed capital threshold
• Segmenting the loan book
• Linking macroeconomic and bank-level variables. Peer benchmarking
• Econometric techniques for stress testing
• Stressing loan loss provisions for retail portfolios – residential mortgages
• Stressing loan loss provisions for retail portfolios – consumer finance
• Failed bank historical data – sanity check

Case Study: Stressing the Retail and Consumer Finance divisions at Lloyds Banking Group Plc

Workshop 2: Stressing retail and consumer finance lending at Banco Santander SA

Performing The Capital Stress Test – Corporate/SME Lending

• Stressing loan loss provisions for corporate/SME portfolios
• Stressing identified problem segments. Examples – commercial real estate (CRE); commodities
• Failed bank historical data – sanity check

Case Study: Stressing the Commercial division, including CRE, at Lloyds Banking Group Plc

Workshop 3: Stressing corporate/SME and CRE lending at Banco Santander SA

Performing The Capital Stress Test – Market Risk And Operational Risk

• Stress testing market risk
• Stress testing operational risk

Case Study: Stressing market and operational risk at Lloyds Banking Group Plc

Performing The Capital Stress Test – Completing The Test

• Inputting stressed loan loss provisioning results into the stress test model
• Interpretation and application of capital stress test results
• Reverse stress tests

Case Study: Completing the stress test – Lloyds Banking Group Plc

Workshop 4: Completing the stress test – Banco Santander SA

Stress Test Case Studies – External Supervisor-Driven

• ECB/EBA Comprehensive Assessment of EU banks, 2014
• ECB/EBA EU bank stress test, 2016
• US Federal Reserve Comprehensive Capital Analysis and Review of US banks, 2015
• Bank of England UK Bank Stress Test 2015
• Central Bank of Ireland/BlackRock Solutions Financial Measures Programme encompassing Prudential Capital Assessment Review of Irish banks, 2011
• Oliver Wyman Asset Quality Review and Stress Test of Spanish banks, 2012

Stress Test Case Studies – ICAAP

• EBA’s Draft Guidelines on Stress Testing and Supervisory Stress Testing (for ICAAP and SREP)
• Stress testing in ICAAP at Barclays Plc
• Stress testing in ICAAP at Banco of America Corporation
• Stress testing in ICAAP at DBS Group Holdings Ltd

Stress Test Case Studies – Investor-Driven

• Stress testing Chinese banks – Industrial & Commercial Bank of China Ltd; Bank of China Ltd; China Construction Bank Corporation; Agricultural Bank of China Ltd
• Stress testing Standard Chartered Plc
• Stress testing HSBC Holding Plc
• Stress testing Banca Monte Dei Paschi di Siena SpA