Stress Testing

What are the benefits of stress testing?

Note: Please select all that apply.

• Focus on extreme risks, hence particularly useful for ‘event’ risks

• Allows appropriate pricing of risk and support portfolio allocation decisions.

• Identify correlations within the portfolio.

• Addresses regulatory requirements (ICAAP) and regulatory stress testing programs

Events are exogenous to the markets/economy, often tied to specific characteristics of portfolio or exposures.

E.g. terrorist attack on a financial centre.

What type of scenario do these points belong to:

• Macroeconomic

• Market

• Catastrophe

• Portfolio Driven

Adopts a more granular assessment that is tailored to specific segments within a portfolio or at an individual risk exposure level to provide a comprehensive assessment of risks.

This definition belongs to:

• Historical

• Bottom Up

• Top Down

• Hypothetical

High-level assessment which applies a defined set of macroeconomic scenarios and related stress factors to a group of exposures aggregated at the portfolio level to identify areas of vulnerabilities which can arise from changes in economic and financial conditions.

This definition belongs to:

• Historical

• Top down

• Bottom up

• Hybrid

Macroeconomic is one of the factors/drivers in the sensitivity analysis.

The following choices of macroeconomic factors are correct EXCEPT:

• Loan non-performance

• GDP growth

• Inflation

• Government debt

Multi-dimensional

Typically includes macroeconomic scenarios

Accounts for correlations between risk factors

Usually based on hypothetical data but may also reconstruct history

These points belong to:

• Negativity Analysis

• Scenario Analysis

• Sensitivity Analysis

• Positivity Analysis

VaR is a useful technique to determine how much the Bank could lose with a given confidence level.

What does VaR stand for in stress testing?

• Vulnerability-assessment-report

• Variance-analysis-report

• Video-assistant-referee

• Value-at-risk

Starts with bank failure and then traces back to the combination of operating conditions that would lead to that outcome.

This is an example of:

• Stress Testing

• Reverse Stress Testing

• Spillover

• VaR

Please select all that apply to Stress Testing Policy Requirements:

• Responsibilities of Board and Senior Management

• Policies, Procedures and Documentation

• Construction of Internally Developed Scenarios

• Reverse Stress Testing Requirements

Para 12.1 - 12.4

Should cover broad range of scenarios capturing forward looking elements and emerging risks, which are not necessarily covered by historical events

Parameters should be conservative to avoid underestimation of risks

Coverage to include significant activities and consider all material risks

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Which segment in the BNM's Stress Testing Policy Requirements applies to the statements above?

• Use of Stress Testing Results in Formulating Management Actions

• Responsibilities of Board and Senior Management

• Stress Testing Methodology

• Stress Testing Approaches