Stress Testing Fundamentals

Description

Program Overview

This intensive two-day workshop provides finance, risk, and regulatory professionals with a comprehensive understanding of stress testing principles, methodologies, and applications. Participants will move from theoretical foundations to practical implementation, learning to design, execute, and interpret stress tests that effectively measure institutional resilience under adverse economic scenarios. The program emphasizes regulatory requirements (CCAR, DFAST, ICAAP) while balancing quantitative rigor with strategic business implications.

Target Audience: Risk managers, financial analysts, regulatory compliance officers, treasury professionals, internal auditors, and business line managers in banking and financial services.

Instructional Approach: Case-based learning, hands-on Excel exercises, regulatory scenario analysis, and interactive discussions with expert facilitation.

Program Objectives

Upon completion, participants will be able to:

1. Explain the purpose, regulatory landscape, and core components of financial stress testing frameworks.

2. Distinguish between different stress testing types (scenario, sensitivity, reverse) and their appropriate applications.

3. Apply key methodologies for projecting balance sheet, income statement, and capital metrics under stress.

4. Construct a basic stress testing model for credit risk, market risk, or operational risk using provided templates.

5. Interpret stress test results to communicate business implications and inform risk management decisions.

Detailed Program Content

DAY 1: FOUNDATIONS, FRAMEWORKS & CREDIT RISK STRESS TESTING

Module 1: Stress Testing Landscape & Regulatory Drivers

• Content: Evolution of stress testing post-2008; Objectives: capital adequacy, risk identification, strategic planning.

• Key Frameworks: CCAR (Comprehensive Capital Analysis and Review), DFAST (Dodd-Frank Act Stress Tests), Basel III/ICAAP.

• Activity: Regulatory timeline mapping – tracking global stress testing requirements.

Module 2: Core Methodologies & Scenario Design

• Content: Scenario vs. Sensitivity vs. Reverse Stress Testing. Developing severe but plausible scenarios.

• Key Concepts: Macroeconomic variable selection (GDP, unemployment, rates), transmission channels, supervisory vs. internally-developed scenarios.

• Activity: Critique of a sample macroeconomic scenario – assessing plausibility and severity.

Module 3: Credit Risk Stress Testing (Part 1)

• Content: Portfolio segmentation (retail, wholesale). Key risk parameters: PD (Probability of Default), LGD (Loss Given Default), EAD (Exposure at Default).

• Modeling Approaches: Statistical models (regression, transition matrices) vs. expert judgment.

• Activity: Portfolio segmentation exercise – categorizing sample loan book.

Module 4: Credit Risk Stress Testing (Part 2) & Hands-On Modeling

• Content: Stressing PDs and LGDs using macroeconomic drivers. Building a simplified P&L and capital impact model.

• Key Tool: Excel-based credit loss forecasting template (provided).

• Hands-on Exercise: Participants shock key variables and calculate projected credit losses, provision expenses, and CET1 impact for a sample portfolio.

DAY 2: MARKET & OPERATIONAL RISK, INTEGRATION & GOVERNANCE

Module 5: Market Risk & Counterparty Stress Testing

• Content: Stressing trading book exposures: interest rate risk, FX risk, equity risk. Counterparty Credit Risk (CCR) and CVA (Credit Valuation Adjustment).

• Key Methods: Historical simulation, hypothetical scenarios, factor shocks.

• Activity: Applying interest rate shock scenarios to a sample bond portfolio.

Module 6: Operational & Liquidity Risk Stress Testing

• Content: Operational risk event typologies and loss distribution approaches. Liquidity stress tests: cash flow mismatches, funding concentration, contingent liquidity.

• Key Metrics: LCR (Liquidity Coverage Ratio), NSFR (Net Stable Funding Ratio) under stress.

• Activity: Identifying liquidity risk triggers in a case study bank’s balance sheet.

Module 7: Integrating Results & Capital Planning

• Content: Aggregating risks (diversification vs. compounding effects). Projecting capital ratios (CET1, Tier 1, Total Capital). Assessing capital adequacy and planning actions (capital raises, dividend restrictions).

• Key Output: Management Dashboard – translating numbers into strategic insights.

• Activity: Building a simple integrated capital projection from provided module outputs.

Module 8: Governance, Challenges & Future Trends

• Content: The three lines of defense model. Model risk management and validation. Common pitfalls: over-reliance on models, weak challenge functions.

• Future Trends: Climate risk stress testing, non-financial risk integration, AI/ML in scenario generation.

• Capstone Exercise: Participants present key findings from a simplified stress test to a mock Board/Risk Committee, focusing on business implications and recommended actions.

Program Outcomes & Measurable Impact

Immediate Outcomes (Post-Training):

• A Complete Toolkit: Excel templates for credit loss forecasting, capital projection, and a scenario analysis checklist.

• Methodology Understanding: Clear grasp of the end-to-end stress testing process from scenario design to capital impact.

• Regulatory Literacy: Ability to navigate key requirements of CCAR, DFAST, and ICAAP frameworks.

Applied Competencies (Within 1-3 Months):

• Enhanced Contribution: Ability to contribute meaningfully to internal stress testing exercises or working groups.

• Model Building: Capability to build or enhance basic departmental stress testing models.

• Critical Analysis: Skills to challenge assumptions and interpret stress test outputs for business areas.

Organizational Impact (Within 6-12 Months):

• Improved Risk Identification: Earlier recognition of emerging vulnerabilities through sensitivity analysis.

• Better Decision-Making: More robust capital and strategic planning informed by rigorous stress analysis.

• Strengthened Governance: Clearer understanding of model risks and validation needs within stress testing programs.

• Regulatory Preparedness: Enhanced readiness for regulatory submissions and examinations.

Participant Materials & Support

• Comprehensive program workbook with reference guides

• Excel modeling templates with sample data

• Regulatory framework comparison chart

• Glossary of stress testing terminology

• Access to curated online resource portal with regulatory guidance

• Optional: 30-minute post-training consultation for plan implementation

Program Value Proposition:
Bridge the gap between regulatory expectation and practical implementation, transforming stress testing from a compliance exercise into a strategic risk management tool.