Stress Testing Publications

The future remains inherently uncertain. Neither the market nor the experts possess a crystal ball that predicts exactly what will occur. In addition to unbiased measures of Expected Default Frequency (EDF) and Expected Losses (EL), market participants also find it useful to estimate losses conditional upon a specific realization of the market environment. Scenario-based credit risk models are also becoming a business necessity, given increased regulatory and internal risk management requirements for periodic stress tests.

Author: Jun Chen and Kevin Cai
Date: December 16, 2011

In recent years, stress testing has become more important, fueled by regulatory requirements and the weakened economic environment. Indeed, many companies are undertaking stress testing for more than just regulatory compliance; a growing number are integrating the process into business-planning and strategy-setting procedures. But stress testing has a long way to go before it becomes a fully embedded risk-management practice. This article has been published in CFO magazine and by clicking on the link above, you will be redirected to the CFO magazine website.

Author: Nicolas Kunghehian
Date: December 14, 2011

In response to the new stress test requirements announced by the U.S. Federal Reserve on November 22, 2011, Moody’s Analytics, a leading independent provider of economic forecasting, has today announced the addition of the Fed’s baseline and stress test scenarios to its U.S. Macro Forecast Model®.

Author: Jessica Schaefer
Date: December 6, 2011

The financial crisis has highlighted weaknesses in current stress testing practices. This presentation gives a highlight on the definition of stress scenarios, the translation of these scenarios into changes in risk drivers, and the stress testing best practices in banks.

Author: Christian Thun & Peter Knowles
Date: November 9, 2011

This presentation has been presented at the International Banking Conference Asset and Liabilities Management in Warsaw, 25 - 26 October 2011. It goes through an overview of the stress testing framework in Banks, a comparison between stress tests and sensitivity analysis, and an explanation of the economic scenario generation and calculation techniques.

Author: Nicolas Kunghehian
Date: October 25, 2011

Stress Testing is a current hot topic in the financial market and for this reason, Moody's Analytics experts shared their views on Stress testing best pratices at a Breakfast round table organised in London, Oct 13th 2011. This presentation gives a view on where banks stand today in their efforts to integrate stress testing, the lessons that have been learned from the EBA 2011 and EU 2010 stress tests, as well as explains the gap between sophisticated stress test approaches and the application in the business.

Author: Christian Thun and Charles Stewart
Date: October 13, 2011

This presentation was given at a recent BBA Stress Testing & Liquidity Third Party Conference, London. Learn about: Moody’s Analytics’ 2011 Stress Testing Survey, Stressing Credit Risk drivers; Impact on credit portfolio capital and Modeling techniques for stressed liquidity risk drivers.

Author: Charles Stewart & Nicolas Kunghehian
Date: September 14, 2011

Moody’s Analytics’ “2011 Banking Industry Survey on Stress Testing” provides an overview of current best practices and remaining challenges in the European banking industry. The survey was conducted in the second quarter of 2011 and included more than 40 in-depth, one-on-one interviews with senior practitioners with risk and finance functions at banks of all sizes in Europe.

Author: Maria Canamero
Date: September 14, 2011

ICAPP Overview, ICAAP Framework, and Supervisory Review

Author: Vishal Kapoor
Date: August 19, 2011

ICAAP Solution Overview, Spreading & Rating stress test, Portfolio management, From KRI to KPI scenario analysis, Balance sheet and Liquidity stress, ICAAP enforcement

Author: Erik Ibron
Date: August 19, 2011

The EU’s second bank stress test was intended to provide transparency about the European banking system. However it will not result in banks raising sufficient capital to strengthen their balance sheets to cushion against some potentially damaging shocks to the outlook. The alternative scenario used in the stress test was not severe enough and the European Banking Authority, which conducted the tests, failed to consider the effects on bank balance sheets from a sovereign default. This article considers the impact on the European banking sector and financial markets and asks whether more measures are needed to test institutions under the conditions of sovereign default, and if the data provided by the banks was of sufficient quality.

Author: Juan Licari
Date: July 1, 2011

Moody’s Analytics' presentation on alternative scenarios highlights key points to evaluate the impact of shocks, expose vulnerabilities and develop strategic business plans while enhancing regulatory compliance. By analyzing the common business challenges in the industry, Moody’s Analytics provides a recommendation on how to make informed decisions that minimize risks & maximize opportunities resulting from economic changes(both good and bad).

Author: Celing Cheng
Date: June 21, 2011

With more than 900 customers worldwide in origination, Moody’s Analytics presents the Best practices for improved productivity in the loan origination and credit assessment process. RiskOrigins, a modular workflow-driven platform for the risk department and business users, is featured in the presentation.

Author: Marc Rodriguez
Date: June 21, 2011

This presentation on Credit Risk Measurement & Monitoring presents Moody’s Analytics’ EDF products (CreditEdge, RiskCalc and CreditEdge Plus) in the context of Public and Private firm EDF measures. Moody’s Analytics shares its model methodology, credit assessment and monitoring process.

Author: Celing Cheng
Date: June 21, 2011

Why do banks fail? What is the current regulatory market telling us? And can we right the wrongs of the past? Our Moody’s Analytics experts have tackled these questions at a forensic level. Here they present their findings and pass on some valuable lessons.

Author: Jing Zhang, Mark Zandi, Amnon Levy, Douglas Dwyer, Lee Medoff
Date: May 17, 2011

Moody’s Analytics provides strategic solutions for measuring and managing risk. We put the best practices of the entire world of credit, economics and financial risk management at your fingertips, helping you compete in an evolving marketplace. In this article Alain Maure explores how Moody’s end -to-end risk management of integrated reporting, stress testing and powerful automated analytics can help an organisation to plan successfully by running multiple scenarios over the short, medium and longer term. He also gives his expert view on the effects of new regulation.

Author: Alain Maure
Date: May 1, 2011

Here you will find details of Moody’s Analytics’ scenario and stress testing tool that allows you to address regulatory challenges following the financial crisis. Whilst historically stress testing has been in place for some time, the frequency of the reports and the level of detail that senior managers will now require, means that firms will be looking for adaptable stress testing models to suit their business in a way that joins up with their existing risk management tools. Moody’s Analytics’ stress testing is one of the largest and most comprehensive in the market. Read here to find out more.

Author: Theodoros Theodorou
Date: April 4, 2011

Stress testing regulations introduction It is now widely recognised that beyond complying with regulatory requirements, effective implementation of stress testing can also help banks to better understand their risk appetite and promote improved business discipline. As such, stress testing is an important element of all firms’ risk management and control policies, limit setting and external communication. This presentation explores this in light of the BCBS stress-testing guidelines of 2009 that aimed to make sure firms can meet capital and liquidity needs under stressed conditions.

Date: March 11, 2011

Why does the value of a facility and the portfolio change, and how do you best calculate the value of this loss? This presentation examines how stressed conditions impact portfolio distributors differently at the macroeconomic level and that certain scenarios that take account of integrated risk are very effective in managing all types of risk.

Author: Alexis Hamar and Esben Mikkelsen
Date: March 1, 2011

Here you will find slides relating to test scenarios at the macroeconomic level in developed and emerging markets. We also show you the modelling rating transitions and how to forecast credit ratings using econometric methods. Through these processes, stress testing becomes a natural extension of the model and can help to identify the impact of changes (shocks) on economic variables.

Author: Juan Licari
Date: March 1, 2011

Stress testing survey, Europe February – November 2010 Moody’s surveyed over 200 experts at our stress testing forum series and other industry events in Amsterdam, Frankfurt, London, Madrid, Milan, Paris, Warsaw and Zurich between February and November 2010. Here we breakdown the important findings of that research, which has risk and data architecture alongside scenario building at the top of the list of necessary challenges for financial organisations.

Author: Sandrine Prioux
Date: December 1, 2010

Reverse stress testing is becoming recognised throughout the world for its benefits. This presentation explains what reverse stress testing is and what it can achieve, along with the challenges it presents. Here we show you why reverse stress testing can lead to a deeper understanding of an organisation’s susceptibility to risk and why it is a valuable tool for any risk management strategy.

Author: Juan Licari 
Date: November 23, 2010

To understand the most important risks in your portfolio you must define your appetite for risk, your capabilities in a worst case scenario and then capture data that backs these two things up. By sharing this information with the regulators and with your organisation, and by testing specific areas of risk you can make informed contingency plans and explore new ways to manage risk. This presentation shows you what you need to take into account to achieve this.

Author: Nicolas Kunghehian
Date: November 17, 2010

This presentation provides a step by step guide to identifying risk and then evolving the correct models and scenarios required to assess that risk. It also asks what the impact of such testing can have on the market (in terms of equities, CDS spreads etc) and the value of performing stress tests in relation to portfolio performance. Using Moody’s analytics software (ERM), the case study also considers alternative scenarios for the Greek economy.

Author: Juan Licari
Date: November 1, 2010

An expert panel, including Moody’s Analytics’ Nicholas Kunghehian, gathered in London to discuss liquidity risk management in the wake of the financial crisis. Lessons clearly needed to be learnt. This round up of the event provides views from inside the industry about the response from financial institutions and what motivates behaviours. These are valuable and instructive if we are to fully understand what went wrong. The “regulatory tsunami of documents” is undoubtedly an unpopular part of the answer that the banks accept they must swallow, but the best and most proactive response lies in accepting new technology and assessing business requirements, since they change with activities in the market and therefore cannot fit into a ‘one size’ solution.

Author: Nicolas Kunghehian 
Date: July 1, 2010

This slide deck looks at the impact on liquidity risk of the new ratios defined by BCBS and explores appropriate stress testing method to determine this. See in detail how Moody’s six-pronged stress testing method for stress testing liquidity takes account of a number of important factors in a joined up, cohesive way.

Author: Nicolas Kunghehian 
Date: July 1, 2010

Alexis Hamar, Credit Portfolio Management Specialist at Moody’s Analytics, takes a look at the predictive capabilities of modelling portfolio management/economic capital during the crisis, as a benchmark to the credit default swap (CDS) market. He explains how Moody’s Analytics stress testing for correlations works and the benefits it carries.

Author: Alexis Hamar
Date: February 1, 2010

This white paper by Nicolas Kunghehian, asset and liability management (ALM) specialist at Moody’s Analytics, looks at liquidity risk in light of the financial crisis and touches on the “advanced approach” stress testing which is now part of banking regulations. Largely, the banks have welcomed new regulations which provide an opportunity for integration of IT, data capture and stringent internal reporting. It is suggested that despite the regulatory burden, very real opportunities for profitability exist in this new environment, provided liquidity risk is at the top of an organisation's agenda; otherwise you may miss out on market activities because new business cannot be financed.

Author: Nicolas Kunghehian
Date: February 1, 2010

Basel II authorises banks to implement proprietary methodologies to test their capital adequacy and quantify their target capital according to their risk profile. Stress scenarios, which are designed to analyse the sensitivity of equity metrics to changes in the economic environment or to market and liquidity events, are exactly what banks need to perform this exercise and detect any weaknesses in their Basel ratio. Victor Pinto, Credit Risk Solutions Specialist at Moody’s Analytics, drawing on his practical experience, takes a pragmatic look at how banks can implement stress-testing of regulatory capital.

Author: Victor Pinto
Date: February 1, 2010

This opinion piece from Moody’s Alain Laurin (Senior Vice President, Regional Credit Officer for the Europe, Middle East and African region (EMEA)) explores how a lack of confidence from the financial crisis has spilled over into modelling techniques, which failed to identify these risks. Not everyone is in agreement as to why this was the case, but he concludes that the banking sector is facing a major challenge: to reorganise its processes, and able to carry out meaningful stress tests.

Author: Alain Laurin
Date: February 1, 2010