Regulators are emphasizing the importance of liquidity risk management and liquidity risk stress testing more than ever before. Banks need to identify the composition of the balance sheet, understand factors which affect the balance sheet the most and design scenarios based on these identified factors. A robust stress testing framework helps in developing contingency plans to ensure that all extreme but plausible material scenarios are identified and action plans are defined for each of these scenarios.
The Stress Testing module utilizes such parameters as positions, MDF, cash flows, scenarios and haircuts for various Stress Testing approaches, such as Sensitivity and shock analysis, MD shifts and yield curve slope changes, along with behavioral, hypothetical and scenario based analyses. The results will be stored in a risk repository to be used as feeds to other systems and for regulatory reporting requirements.
Salient features of the Stress Testing module are:
- Var and Stressed Var: Run Value at Risk calculations using multiple methods under normal as well as stressed conditions.
- Sensitivity DV01: Sensitivity analysis and impact of interest rate basis point changes on DV01 for bond pricing.
- Risk Factor Changes: Captures credit defaults, migration risk, with Incremental Risk Charges (IRC), in recognition of stressed markets in the calculation of VaR. Provides the capability of creating custom yield curves with larger credit spreads.
- Hypothetical Transactions: Input hypothetical transactions and view the overall impact before it actually impacts the GL.
- Behavioral Analysis: Flexible behavioral analytics on client behavior modeling, new business and stochastic scenarios. The stress testing engine allows you to manage your liquidity and forecast liquidity gaps.
- Mark to Market: Run various Mark to Market valuations for stochastic analysis and revenue projections.