Course Objectives:
The goal of this course is to identify a comprehensive suite of stress tests, calibrate them and then apply and estimate their impact, both individually and jointly, on individual risk areas – e.g. Credit risk, Market risk, and across the whole bank.

Existing knowledge
It is assumed delegates are familiar with the key concepts of standard, non-stressed banking risk management, such as duration, VaR, CVA, etc. (e.g. they have attended the 2-day Banking Risk Management course).
Learning outcomes

By the end of the course delegates will be able to:
• Understand the range of stresses that may be encountered
• Understand various approaches to calibrating a stress test
• Understand how to apply a stress test both to individual and multiple risk areas in order to quantify their impact
• Understand how the stresses may interact with each other and with different risk areas

Day 1

Session One

Introduction
The importance of stress-testing, Basel II Pillar 2 and the US and other examples

Credit risk stress testing
Default of largest exposure, using assumed LGD
Default of largest exposure using stressed LGD
Defaults within the largest industry type – what %? Historic figures
Historic stressed periods
Knock on effects – e.g. funding cost and availability
Reverse stress test: given FSDH’s capital, what level of stress would result in failure (using the Basel III ‘point of non-viability’ Capital Adequacy Ratio of 4.5%)?
Exercise: Estimating the impact on FSDH’s credit portfolio of stressed credit risk

Session Two

Macro-economic stresses
Recession, unemployment, inflation, etc.
Estimating the level of impact on different risks by using Regression analysis on past stressed periods - estimating the impact on clients’ businesses and on their FSDH internal rating
Capturing the results on an enterprise-wide basis
Exercise: Macro-economic stress testing

Session Three

Market risk stress testing
Interest rate risk (T-bills and bonds): what change in yield levels? Using stressed VaR – e.g. Basel 2.5 ‘Revisions to the Market Risk Framework’
Historic stressed periods – what length of period?
Curve slope changes, historic examples
Impact on long/short trading positions, repo
Exercise: Estimating the impact of government yield rises
Could the government default? The Russian example
Contingency planning for a government default
Interest Rate Risk in the Banking Book (IRRBB) – calibrating then applying the stress
FX risk sources. What change in FX rates? Historic stressed period changes. What length of period?
Estimating the impact of a suspension of convertibility

Day Two

Session One

Counterparty credit risk (CCR) stress testing
Impact of FX rate moves on Forward FX portfolio - stressed Exposure at Default (EAD) CCR
Largest counterparty defaults
Impact of Industry sector defaulting
Stressed Credit risk and CCR together
Exercise: Stressed CCR for FSDH
Staff in organisations and their attitudes towards risk – risk and reward.

Session Two

Credit Valuation Adjustment (CVA) stress testing
Stressed CVA – largest counterparty downgrade
Stressed Credit risk, CCR and CVA together
Exercise: Stressed CVA for FSDH

Session Two

Operational risk stress testing
Estimating the impact of Head Office closure, IT failures, errors, fraud, etc.
Exercise: Estimating the impact of Operational risks

Session Three

Liquidity risk stress testing
Loss of largest single funding provider
Loss of all unsecured wholesale funding
Deposit run-off – e.g. Basel III Liquidity Coverage Ratio (LCR) %s and historic experience
T-Bill yield stressed rise
Exercise: Estimating the impact of Liquidity stress on FSDH

Session Four

Political stresses
Estimating the impact of a change in government personnel, the Russian example
Estimating the impact of insurgency
Estimating the impact of corruption

Session Five

Climate change stresses
Estimating the impacts of:
Food price rises and shortages
Water shortages
Storms
Floods
Fossil fuel use rationing