Stress Testing – Making it part of Risk Management Best Practice Eric Leman - Associate Director, Solution Specialist (EMEA) Originally presented as a part of a recorded Moody’s Analytics Webinar | May 12, 2014

The Stress Testing Calculation – The Big Picture

Central Datamart (Oracle) 3 Tier Infrastructure

Integrated risk and finance infrastructure 3

Administration

Historical Views

Calculation Workspaces

Portfolio

Source Systems Treasury, Investments, Assets & Liabilities, Commitments, Counterparties,…

Calculation Rules and Results

Overseas

Head Office

Domestic HK TW Market Data

Bloomberg, Reuters

General Ledger GL Recon.

Capital Items

Risks & Behavioral Models

Stress Scenario

Regulation Delivered & maintained by Moody’s Analytics

Local Reporting requirements at each consolidation level Business Rules & Workflows

Calculation & Reporting

Engines

Data Editing & Querying Data Patching Tool Error Checking

GL reconciliation Data Adjustment Workflows

Dashboard & Alerts Graphical Analytics Publishable Reports

Regulatory Reports Updated regularly for local compliance

Domestic

Overseas

Comprehensive data model for bank-wide activity 4

Model financial products at granular level with dedicated sections

» Reference fields

» Characteristics

» Amortizing & Fixing

» Credit Risk

» Liquidity Risk

» Free Attributes

5

Loans and deposits

A centralized scenario analysis framework is essential

Business strategy (Business growth, Risk appetite, target rating, M&A, etc,)

PD & LGD models Commercial & Industrial Commercial Real Estate Residential Real Estate Retail

Economic/Regulatory Scenarios (Third-party, Bank’s owns, CEBS, FED)

Regulatory capital EAD = f(behaviors, new volumes) Risk mitigation / Effective LGD RWA = f(EAD, PD, LGD*) Countercyclical Capital Buffer

Translation engines

Economic capital EAD = f(behaviors, new volumes) Risk mitigation / Effective LGD EC = f(EAD, PD, LGD*, Correlations)

Market data Interest rates Market prices Exchange rates Correlations

Translation engines

Balance Sheet Contractual/Behavioral Amortizing/New volume Cost of funds / FTP Net Interest Income

Translation engine

Bank’s eligible Capital Common equity (raises/buybacks) Dividends / Retained earnings Minority interests Sub debt maturing/issuance Provisions/EL/Deductions

Costs / Taxes Modeling Allocation

Translation engine

Bank’s rating Global bank scorecard

Liquidity profile Liquidity gaps LCR / NSFR ratios

Mitigation actions

Performance indicators RAR / EVA RARORWA RAROC

P&L forecasts f(Net Interest Income, costs, credit losses)

Multi periods forecasts

Managem

ent actions

Scenario services and control tools Data

consolidation Analysis tools

Scenario m

anagement

Users

Workflow

Users load their economic forecast into the system (e.g. from a spreadsheet)

A centralized scenario analysis framework is essential

Business strategy (Business growth, Risk appetite, target rating, M&A, etc,)

PD & LGD models Commercial & Industrial Commercial Real Estate Residential Real Estate Retail

Economic/Regulatory Scenarios (Third-party, Bank’s owns, CEBS, FED)

Regulatory capital EAD = f(behaviors, new volumes) Risk mitigation / Effective LGD RWA = f(EAD, PD, LGD*) Countercyclical Capital Buffer

Translation engines

Economic capital EAD = f(behaviors, new volumes) Risk mitigation / Effective LGD EC = f(EAD, PD, LGD*, Correlations)

Market data Interest rates Market prices Exchange rates Correlations

Translation engines

Balance Sheet Contractual/Behavioral Amortizing/New volume Cost of funds / FTP Net Interest Income

Translation engine

Bank’s eligible Capital Common equity (raises/buybacks) Dividends / Retained earnings Minority interests Sub debt maturing/issuance Provisions/EL/Deductions

Costs / Taxes Modeling Allocation

Translation engine

Bank’s rating Global bank scorecard

Liquidity profile Liquidity gaps LCR / NSFR ratios

Mitigation actions

Performance indicators RAR / EVA RARORWA RAROC

P&L forecasts f(Net Interest Income, costs, credit losses)

Multi periods forecasts

Managem

ent actions

Scenario services and control tools Data

consolidation Analysis tools

Scenario m

anagement

Users

Workflow

Import your Credit Models (e.g. PD/LGD regression models, rating transition matrix…)

Import several versions online and validation workflow applies

Get the output of your credit models per segment and experts can update the figures

A centralized scenario analysis framework is essential

Business strategy (Business growth, Risk appetite, target rating, M&A, etc,)

PD & LGD models Commercial & Industrial Commercial Real Estate Residential Real Estate Retail

Economic/Regulatory Scenarios (Third-party, Bank’s owns, CEBS, FED)

Regulatory capital EAD = f(behaviors, new volumes) Risk mitigation / Effective LGD RWA = f(EAD, PD, LGD*) Countercyclical Capital Buffer

Translation engines

Economic capital EAD = f(behaviors, new volumes) Risk mitigation / Effective LGD EC = f(EAD, PD, LGD*, Correlations)

Market data Interest rates Market prices Exchange rates Correlations

Translation engines

Balance Sheet Contractual/Behavioral Amortizing/New volume Cost of funds / FTP Net Interest Income

Translation engine

Bank’s eligible Capital Common equity (raises/buybacks) Dividends / Retained earnings Minority interests Sub debt maturing/issuance Provisions/EL/Deductions

Costs / Taxes Modeling Allocation

Translation engine

Bank’s rating Global bank scorecard

Liquidity profile Liquidity gaps LCR / NSFR ratios

Mitigation actions

Performance indicators RAR / EVA RARORWA RAROC

P&L forecasts f(Net Interest Income, costs, credit losses)

Multi periods forecasts

Managem

ent actions

Scenario services and control tools Data

consolidation Analysis tools

Scenario m

anagement

Users

Workflow

Import Current Balance Sheet and growth assumptions

Get the output of your forecast per segment and experts can update the figures

A centralized scenario analysis framework is essential

Business strategy (Business growth, Risk appetite, target rating, M&A, etc,)

PD & LGD models Commercial & Industrial Commercial Real Estate Residential Real Estate Retail

Economic/Regulatory Scenarios (Third-party, Bank’s owns, CEBS, FED)

Regulatory capital EAD = f(behaviors, new volumes) Risk mitigation / Effective LGD RWA = f(EAD, PD, LGD*) Countercyclical Capital Buffer

Translation engines

Economic capital EAD = f(behaviors, new volumes) Risk mitigation / Effective LGD EC = f(EAD, PD, LGD*, Correlations)

Market data Interest rates Market prices Exchange rates Correlations

Translation engines

Balance Sheet Contractual/Behavioral Amortizing/New volume Cost of funds / FTP Net Interest Income

Translation engine

Bank’s eligible Capital Common equity (raises/buybacks) Dividends / Retained earnings Minority interests Sub debt maturing/issuance Provisions/EL/Deductions

Costs / Taxes Modeling Allocation

Translation engine

Bank’s rating Global bank scorecard

Liquidity profile Liquidity gaps LCR / NSFR ratios

Mitigation actions

Performance indicators RAR / EVA RARORWA RAROC

P&L forecasts f(Net Interest Income, costs, credit losses)

Multi periods forecasts

Managem

ent actions

Scenario services and control tools Data

consolidation Analysis tools

Scenario m

anagement

Users

Workflow

Import your ALM assumptions

A centralized scenario analysis framework is essential

Business strategy (Business growth, Risk appetite, target rating, M&A, etc,)

PD & LGD models Commercial & Industrial Commercial Real Estate Residential Real Estate Retail

Economic/Regulatory Scenarios (Third-party, Bank’s owns, CEBS, FED)

Regulatory capital EAD = f(behaviors, new volumes) Risk mitigation / Effective LGD RWA = f(EAD, PD, LGD*) Countercyclical Capital Buffer

Translation engines

Economic capital EAD = f(behaviors, new volumes) Risk mitigation / Effective LGD EC = f(EAD, PD, LGD*, Correlations)

Market data Interest rates Market prices Exchange rates Correlations

Translation engines

Balance Sheet Contractual/Behavioral Amortizing/New volume Cost of funds / FTP Net Interest Income

Translation engine

Bank’s eligible Capital Common equity (raises/buybacks) Dividends / Retained earnings Minority interests Sub debt maturing/issuance Provisions/EL/Deductions

Costs / Taxes Modeling Allocation

Translation engine

Bank’s rating Global bank scorecard

Liquidity profile Liquidity gaps LCR / NSFR ratios

Mitigation actions

Performance indicators RAR / EVA RARORWA RAROC

P&L forecasts f(Net Interest Income, costs, credit losses)

Multi periods forecasts

Managem

ent actions

Scenario services and control tools Data

consolidation Analysis tools

Scenario m

anagement

Users

Workflow

Get your capital per segment

A centralized scenario analysis framework is essential

Business strategy (Business growth, Risk appetite, target rating, M&A, etc,)

PD & LGD models Commercial & Industrial Commercial Real Estate Residential Real Estate Retail

Economic/Regulatory Scenarios (Third-party, Bank’s owns, CEBS, FED)

Regulatory capital EAD = f(behaviors, new volumes) Risk mitigation / Effective LGD RWA = f(EAD, PD, LGD*) Countercyclical Capital Buffer

Translation engines

Economic capital EAD = f(behaviors, new volumes) Risk mitigation / Effective LGD EC = f(EAD, PD, LGD*, Correlations)

Market data Interest rates Market prices Exchange rates Correlations

Translation engines

Balance Sheet Contractual/Behavioral Amortizing/New volume Cost of funds / FTP Net Interest Income

Translation engine

Bank’s eligible Capital Common equity (raises/buybacks) Dividends / Retained earnings Minority interests Sub debt maturing/issuance Provisions/EL/Deductions

Costs / Taxes Modeling Allocation

Translation engine

Bank’s rating Global bank scorecard

Liquidity profile Liquidity gaps LCR / NSFR ratios

Mitigation actions

Performance indicators RAR / EVA RARORWA RAROC

P&L forecasts f(Net Interest Income, costs, credit losses)

Multi periods forecasts

Managem

ent actions

Scenario services and control tools Data

consolidation Analysis tools

Scenario m

anagement

Users

Workflow

Compute losses, recovery and charge offs

Compare multiple scenarios

Summary of Key Benefits

» A Centralized Data Foundation – Consolidate multiple sources of internal and external data

– Loan-level balance sheet characteristics

– Borrower and property-level risk and financial data

– Economic and any other information significant for cash-flows, P&L and capital

– Data beyond stress testing (e.g. Basel 3)

» A Flexible Infrastructure – Support multiple consolidation levels (this will ensure consistency within the entire group and reduce

overall cost)

– Consistently manage internal and regulatory hierarchies.

– Apply the optimal level of granularity to each purpose

» Timely and Actionable Result Through Automation – Reduce cost and limit errors

– Frequent benchmarks to challenge models

– Using stress testing as a decision making tool to better manage risk, optimize capital allocation and maximize returns

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After the webinar please send your questions to: stresstesting@moodys.com