Stress and Scenario Testing:
CP08/24
ISDA/PRMIA risk seminar, 10 February 2009
Rory Vaughan
Wholesale and Prudential Policy Division
Financial Services Authority
Agenda
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Outcomes
Background
Policy proposals in CP08/24
Next steps
Discussion
Outcomes
• Better-informed and more timely senior
management decision-making
Achieved by:
• Improved stress and scenario testing –
firm-wide, more thoughtful, embedded in
senior management culture; and
• Improved senior management engagement
Background
• Concerns about quality of stress and
scenario testing
• Northern Rock internal audit report
• FSA work
• Industry reviews
• International work
FSA work
• FSA has consistently highlighted the
importance of stress testing to good risk
management
– In 2005, two industry workshops, a Discussion Paper
and a Feedback statement
– 2006 thematic stress testing project…leading to Dear
CEO letter
– BoE / FSA workshops on stress-testing in 2007
– Financial Risk Outlook 2009
Industry and international work
• Industry
– Institute of International Finance, July 2008
– Counterparty Risk Management Policy Group III,
August 2008
• International
– Senior Supervisors Group, March 2008
– Basel Committee on Banking Supervision,
January 2009
Policy proposals in CP 08/24
• Reverse-stress testing
• Capital planning stress
• Other S&S testing policy clarifications
Reverse-stress testing
• Firms consider scenarios most likely to
cause business model to become unviable
• Increased awareness of vulnerabilities
should improve firms’:
– Strategic decision-making;
– Contingency planning; and
– Risk-management arrangements.
• Not a ‘zero-failure’ policy
Scope of reverse-stress testing
• Applies to Banks, Building Societies, CRD
investment firms and insurers
• BIPRU 50K firms with less than £1bn FUM
carved out
Capital planning stress
• Also known as:
– 1 in 25 stress test
– ‘Through the cycle’ stress test
• More comprehensive assessment of material
risks and planned mitigating actions:
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Combinations of risk
Correlations in times of stress
Impact and feasibility of management actions
1 in 25 economic recession scenario – capital held
now to meet stress scenario for BIPRU firms
Other S&S testing policy clarifications
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Pension obligation risk
IRB quantification
Group risk
Market risk
Interest rate risk in the banking book
Securitisation risk
Next steps
• Continued industry engagement during consultation
period
• High-level industry group
• Policy Statement – Q3 2009
• Policy implementation
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Stress and Scenario Testing:
CP08/24
ISDA/PRMIA presentation, 10 February 2009
Rory Vaughan
Wholesale and Prudential Policy Division
Financial Services Authority