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Course Calendar Course Calendar

Bank Stress Testing

Day One

Stress-Testing Motivation And Applications

  • What is stress-testing – capital vs liquidity stress-testing?
  • Motivation for stress-testing – internal vs external supervisory and external investor purposes; business-as-usual vs stressed conditions; bottom-up vs top-down
  • Stress tests as a comprehensive and fully integrated, quantitative health assessment of banks as distinct from partial CAMEL-based approaches
  • Role of stress-testing in Internal Capital Adequacy and Assessment Process (ICAAP), Supervisory Review and Evaluation Procedure (SREP) and setting of Pillar 2 capital requirements, as well as in business planning
  • Banking system-wide stress tests, both in business-as-usual and stressed conditions. The increased role of external stress tests post crisis

Stress Test Model Building Blocks

  • Understanding and modelling pre-provision operating profits
  • Understanding loan loss and other asset provisioning
  • Understanding and modelling the balance sheet
  • Understanding and modelling regulatory capital
  • Linking the income statement, balance sheet and regulatory capital models

Case Study: Setting up the stress test model for Lloyds Banking Group Plc

Loan Loss Provisioning

  • Non-performing exposure and forbearance loan definitions – threshold criteria; entry and exit; borrower group perimeter. Definitional differences across banks
  • Understanding loan losses – loan loss provisions, loan loss reserves, write-offs and recoveries
  • Loan loss provisioning under IAS 39 vs IFRS 9 – moving from an incurred loss model to an expected credit loss model

Case Study: Loan loss provisioning at Lloyds Banking Group Plc

Workshop 1: Setting up the stress test model for Banco Santander SA

Performing The Capital Stress Test – Retail Lending

  • Stress scenario construction and choice of stressed capital threshold
  • Segmenting the loan book
  • Linking macroeconomic and bank-level variables. Peer benchmarking
  • Econometric techniques for stress testing
  • Stressing loan loss provisions for retail portfolios – residential mortgages
  • Stressing loan loss provisions for retail portfolios – consumer finance
  • Failed bank historical data – sanity check

Case Study: Stressing the Retail and Consumer Finance divisions at Lloyds Banking Group Plc

Workshop 2: Stressing retail and consumer finance lending at Banco Santander SA

Day Two

Performing The Capital Stress Test – Corporate/SME Lending

  • Stressing loan loss provisions for corporate/SME portfolios
  • Stressing identified problem segments. Examples – commercial real estate (CRE); commodities
  • Failed bank historical data – sanity check

Case Study: Stressing the Commercial division, including CRE, at Lloyds Banking Group Plc

Workshop 3: Stressing corporate/SME and CRE lending at Banco Santander SA

Performing The Capital Stress Test – Market Risk And Operational Risk

  • Stress testing market risk
  • Stress testing operational risk

Case Study: Stressing market and operational risk at Lloyds Banking Group Plc

Performing The Capital Stress Test – Completing The Test

  • Inputting stressed loan loss provisioning results into the stress test model
  • Interpretation and application of capital stress test results
  • Reverse stress tests

Case Study: Completing the stress test – Lloyds Banking Group Plc

Workshop 4: Completing the stress test – Banco Santander SA

Stress Test Case Studies – External Supervisor-Driven

  • ECB/EBA Comprehensive Assessment of EU banks, 2014
  • ECB/EBA EU bank stress test, 2016
  • US Federal Reserve Comprehensive Capital Analysis and Review of US banks, 2015
  • Bank of England UK Bank Stress Test 2015
  • Central Bank of Ireland/BlackRock Solutions Financial Measures Programme encompassing Prudential Capital Assessment Review of Irish banks, 2011
  • Oliver Wyman Asset Quality Review and Stress Test of Spanish banks, 2012

Stress Test Case Studies – ICAAP

  • EBA’s Draft Guidelines on Stress Testing and Supervisory Stress Testing (for ICAAP and SREP)
  • Stress testing in ICAAP at Barclays Plc
  • Stress testing in ICAAP at Banco of America Corporation
  • Stress testing in ICAAP at DBS Group Holdings Ltd

Stress Test Case Studies – Investor-Driven

  • Stress testing Chinese banks – Industrial & Commercial Bank of China Ltd; Bank of China Ltd; China Construction Bank Corporation; Agricultural Bank of China Ltd
  • Stress testing Standard Chartered Plc
  • Stress testing HSBC Holding Plc
  • Stress testing Banca Monte Dei Paschi di Siena SpA  


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