Credit Risk Stress Testing

Stress testing provides a forward-looking risk assessment to the management and provides an indication of how much capital might be needed to absorb losses, should large shocks occur. Stress testing is an important risk management tool that should be used by banks as part of their internal risk management. Stress testing is especially important after long periods of benign economic and financial conditions, when fading memory of negative conditions can lead to complacency and underpricing of risk.

As per Basel II Pillar II guidelines, banks are required to conduct credit risk stress tests to assess the robustness of their internal capital assessments (as per ICAAP) and the capital cushions above the regulatory minimum (as per Pillar I). Asymmetrix Stress Testing Software allows sensitivity, scenario and reverse stress testing of regulatory capital requirement for credit risk.

Credit Risk Stress Testing Software

Stressed CRAR computation

The software module calculates Stressed CRAR on basis of impact on loss rates, provisioning requirement, pre-provision profits (impact on interest and non-interest income and expenses) and regulatory risk-weights.

Sensitivity tests

The software allows risk users to examine impact of change in individual or multiple factors such as external rating, PD and transition matrix, LGD, CCF, Collateral values etc. on regulatory capital.

Scenario Testing

The software allows user to implement/host macro-economic models to examine their impact on the portfolio or sub-portfolios. The institution may host different satellite models to examine impact of macro-economic factors separately on corporate loss rate, retail loss rate, CRE loss rate, interest income and non-interest income etc.

Reverse Stress Testing

The software also determined what scenarios could reduce the CRAR below a threshold such that the viability of the bank is threatened.

ICAAP and Pillar-II compliance

The software allows the institution to meet Stress Testing requirements under Basel II Pillar-II guidelines.