Economic Stress Testing

• How should I adjust lending standards if the economy goes into a double-dip recession?
• Could my portfolio withstand a sovereign default event in Europe?
• What impact would a prolonged deflation cycle have on current and future loan performance?

• Understand the impact of potential economic outcomes on the performance of your portfolio
• Expose possible vulnerabilities to better manage risk
• Examine performance under a baseline and six alternative scenarios forecasts, all updated monthly
• Test internal models to validate results and assumptions
• Meet regulatory requirements with fully documented and transparent models and methodologies from an independent source

• It is forward-looking. It does not assume that future recessionary episodes will track past ones. We customize a set of fully specified economic scenarios based on suggestions and expertise from our 60+ economists.
• It is flexible and transparent. It is flexible in that it allows the creation of a fully customized solution. Our theoretical approach is fully specified, equation outcomes are transparent, and, when necessary, further calibration on the models is performed to meet the clients' needs.
• It is customized. Our solution is tailored to mimic our clients' portfolio strategies and their key risks. Additionally the stressed scenarios will be developed in line with our clients' unique regional and industry exposures.

• Off-the-shelf or Bespoke Alternative Economic Scenarios
• Economic Scenario Generator for Solvency II
• Calibration services to incorporate macroeconomic variables in existing models
• Stress testing and loss forecasting capabilities across:
  Capital markets
  Consumer credit and retail banking
  Structure finance securities
  Corporate loans
  Commercial real estate
• Asset Management

Financial Metrics: An integrated framework, where the background macroeconomic scenarios are fully calibrated to reflect our alternative assumptions on the relevant risks to the Moody’s Analytics baseline forecast. Key macroeconomic series are then correlated to the relevant financial and credit metrics to produce the output results (e.g., yield and swap rate curves, risk-free rates, CDS spreads, rating migration, equity indexes, etc.).

Rating Transitions: We can stress-test rating migrations for any portfolio of corporate (financials and non-financials) and sovereign bonds. The migration information can be provided by internal rating models and/or using Moody’s transition data. Our approach: Dynamic panel data models to capture the behavior of transition matrices over time. This exercise allows us to quantify the sensitivity of migrations to changes in macro and financial series.

Credit Portfolio Risk Optimization: Beyond regulatory driven stress testing exercises (ICAAP or Solvency II), many of our clients use our economic and credit expertise for portfolio risk optimization projects. In such projects we help investment strategy and risk teams to stress portfolios under different custom scenarios  in order to provide investment criteria recommendations in line with the client risk appetite and investment objectives. These exercises are particularly popular among our asset management and insurance clients who may be required to divest under their credit investment policy should certain shocks affect the ratings of their assets.

ESG Engine for Solvency II:  Economic Scenario Generator (ESG) is the cornerstone of a market-consistent valuation of the balance sheet. In particular, ESG represents what we consider to be the appropriate tool to properly monitor and manage both market and credit risk from an integrated perspective. Our clients can benefit from our ESG service in two ways; by being delivered custom outputs from our in-house model or by implementing our ESG engine within their existing platforms and therefore being in full control of the process.