Macroeconomic Model Building: Stress testing at a UK G-SIB

Challenge and Regulatory Context

  • This project was part of a broader stress testing implementation process at a Globally Significant Investment Bank (G-SIB)
  • Its main objective was to define an appropriate methodology for credit risk stress testing in the banking book and develop a suite of appropriate macroeconomic models
  • Stress testing methodology and macro models had to comply with both internal & regulatory requirements

Success

  • The stress testing methodology and macro model building guidelines were independently reviewed and approved
  • The banking book was split into several portfolios with different sensitivities to market stress and appropriate macro models were built
  • Macro models successfully completed independent validation and were employed in various stress tests

Approach

  • In order to tailor the stress testing methodology to client’s needs and risk management practices we analysed the available data and various options for building stress testing models
  • We defined the steps of the proposed model building process and described the analytical procedures and statistical tests required
  • Individual elements of the methodology were discussed and agreed with the client
  • In order to prove the soundness of the methodology we built pilot models in line with the proposed guidelines and had them validated
  • As part of the knowledge transfer we also trained the client’s model developers in the new model building methodology and helped them build several models

Services: Stress Testing  CCAR  EBA