The recent financial crisis highlighted the need for banks to incorporate stress tests into their risk management practices, demonstrating the unpreparedness of the banks to deal with particularly adverse events leading to acute institutional and systemic risks. Aptivaa has the unique experience of working with the international supervisory standards including the Stress Testing guidance of specific regulatory regimes, and for that reason is in an advantageous position with ability to seamlessly adapt its stress testing frameworks to the needs to various regulations. The FDIC Stress Testing guidelines for banks with total consolidated asset threshold of $10 billion focuses not just on sensitivity analysis and scenario analysis, but also on reverse stress testing. The guidelines also call for greater disclosures around stress testing. This presents an ideal opportunity for banks to adopt best practices in stress testing, both from a methodological perspective and also from a governance angle.
Our stress testing framework provides the banks with assistance in:
- Building stress testing models incorporating scenarios mandated by the Federal Reserve under the Dodd Frank Act, incorporating scenarios of Supervisory Baseline, Supervisory Adverse and Supervisory Severely Adverse Scenarios
- Generating macroeconomic models which would link economy- wide factors to bank performance and capital
- Drafting Governance structure around stress testing, to ensure a stress testing regime that is accurate as well as credible
- Relevant statistical techniques (econometric modeling approaches) are customized to capture nuances within each portfolio of the bank.
- Ensuring the best practices are followed in the stress testing framework
- Developing contingency plans, capital raising plans and other strategic initiatives, as a response to results of the stress testing