Stress-testing is essential to banks and regulators. It forms the backbone of a bank’s ICAAP (Internal Capital Adequacy Assessment Process), and answers a simple question: can a bank survive extreme but plausible scenarios which adversely impact its profitability, liquidity, and capital adequacy? However, stress-testing is complicated. It requires an integrated approach starting with how scenarios should be selected and calibrated, and how these scenarios ultimately translate into financial impact whilst respecting the various interrelationships between different types of risks.

This course has been designed for practitioners needing to understand how to implement and/or improve stress-testing frameworks in their banks. Since credit risk is central to the business models of most financial institutions, the course starts by taking a deep-dive into credit risk stress-testing. This is done by building an evolution of PDs (probabilities of default) based on stress-testing scenarios, and then translating scenario parameter values into financial impact using the staging rules of IFRS9. Stress-testing for market risk is explained by using numerical illustrations of how losses arise from interest-rate risk in the banking book, FX exposures, equity portfolios, and bond investments. For operational risk stress-testing, the course shows how to capture high-frequency low impact events as well as low-frequency high impact events. Liquidity risk stress-testing is also explained, including how to embed the impact on bank survival of an inability to refinance funding liabilities when credit conditions deteriorate. Practical considerations focused on ESG stress-testing are also included.

The course provides significant opportunity for discussion and questions, and is aided most importantly by clear illustrations and numerical examples which assist in learning several different methodologies and techniques that can be immediately applied in practice.

Key Highlights and Learning Outcomes:

• Learn essential methodologies applied by banks for integrated stress testing
• Understand techniques which translate stress testing scenarios into their resulting impact on bank earnings, liquidity, and capital adequacy
• See in detail how stressed losses arise and how they are calculated for credit risk, interest rate risk in the banking book, FX exposures, equity portfolios, bond investments, and operational risk.