大浩浩的笔记课堂——FRM考试学习笔记126

Topic 55 Stress Testing Banks

1.Background:

⑴After the 2007 to 2009 financial crisis,it was clear that traditional risk measures such as regulatory capital ratios were insufficient.Supervisory stress-testing became an important risk-assessment tool at that point.

⑵The goal of stress testing is to assess how much capital and liquidity a financial institution needs to support its business activities.

2.Introduction:

⑴3 kinds of capital and liquidity:

①the capital/liquidity you have

②the capital/liquidity you need to support business activities

③the capital/liquidity the regulators think you need

⑵A successful macro-prudential/stress testing program,has at least 2 components:

①a credible assessment of the capital strength of the tested institutions to size the capital "hole"

②a credible way of filling that "hole"

⑶features of stress testing:

①The 2009 supervisory capital assessment program(SCAP):

It is tested with 3 variables which is including growth in GDP,unemployment(tied to credit card loans),and the house price index(HPI).

②pre-SCAP vs. post-SCAP:

3.Designing the stress scenario:

⑴The real difficulty in designing stress is:

in specifying a coherent joint outcome of all the relevant risk factors

⑵The challenges in designing stress test are:

①One of the challenges is coherence.

②Not everything goes bad at once.

③Hundreds of thousands of positions in the trading book must be mapped to thousands of risk factors.

④The sensitivities and scenarios must be extreme,but must also be reasonable and possible.

⑤Problems are inherently multi-factor,making it more difficult to design a coherent stress test.

4.Executing on the stress scenario:

⑴the challenges in modeling losses ＆ revenues:

①One concern is how to translate the macro-risk factors(GDP,unemployment,HPI) employed in stress testing into micro(bank specific) outcomes related to revenues and losses.

②Modeling revenues over a stress test horizon period is much less developed than modeling losses.

⑵the challenges in modeling the balance sheet:

①Determining post-stress capital adequacy requires modeling both the income statement("flows") and the balance sheet("stocks") over the stress test horizon(T+1 years for a T-year stress test),typically 2 years.

②The challenging is the capital change due to dividend payments change,buying back stocks or issuing stock options.

5.Stress test comparisons:

⑴SCAP(2009):

All banks with $100 billion or more in assets of 2008 year end were included:

①methodologies:

A.Tested simple scenarios with 3 dimensions,GDP growth,unemployment,and the house price index(HPI).

B.Historical experience was used for the market risk scenario:

e.g.the financial crisis such as a period of "flight to safety",the failure of Lehman,and higher risk premia.

C.A "one-size-fits-all" approach

②disclosure:

A.Disclosure was a significant feature:

It leads to the transparency and allowed investors and the market the ability to check the severity of the stress tests and the outcomes of the stress at the individual bank level.

B.First to provide bank level projected losses and asset/product level loss rates.

③findings:

A.19 SCAP banks were required to raise $75 billion within 6 months.

B.The undercapitalized banks actually raised $77 billion of tier 1 common equity and none of the banks were forced to use the Treasury´s Capital Assistance Program finds.

⑵comprehensive capital analysis and review(CCAR)(2011):

①methodologies:

In recognition of "one-size-fits-all" stress testing,CCAR asked banks to submit results from their own baseline and stress scenarios.

②disclosure:

Only macro scenario results were published.(not bank level results)

⑶CCAR(2012):

①methodologies:

Banks were again asked to submit their own baseline and stress test results.

②disclosure:

Similar in detail to SCAP 2009 bank level and asset/product level loss rates disclosed.

⑷European Banking Authority(EBA) Irish(2011):

①methodologies:

It is similar to EBA Europe(2011).(time horizon is 2 years)

②disclosure:

A.comparison of bank and third party projected losses

B.comparison of exposures by asset class and geography

C.Data is electronic and downloadable.

D.The disclosures were needed to increase trust in the European banking system.

③findings:

A.After passing the 2010 stress tests,2011 stress tests revealed Irish banks needed €2.4 billion.

B.Greater disclosure in 2011 resulted in tightening credit spreads on Irish sovereign and individual bank debt.

⑸EBA Europe(2011):

Formerly the Committee of European Bank Supervisors(CEBS),90 European banks were stress tested:

①methodologies:

A.There are specified 8 macro-factors(GDP growth,inflation,unemployment,commercial and residential real estate price indices,short and long-term government rates,and stock prices) for each 21 countries and specified over 70 risk factors for the trading book.

B.It also imposed sovereign haircuts across 7 maturity buckets.

②disclosure:

A.bank level projected losses

B.comparisons of exposures by asset class and geography

C.Data is electronic and downloadable.

D.The disclosures were needed to increase trust in the European banking system.

③findings:

8 banks were required to raise €2.5 billion.

大浩浩的笔记课堂之FRM考试学习笔记合集