Learning objectives: Describe the historical evolution of the stress testing process and compare methodologies of historical EBA, CCAR and SCAP stress tests. Explain challenges in designing stress test scenarios, including the problem of coherence in modeling risk factors. Explain challenges in modeling a bank’s revenues, losses, and its balance sheet over a stress test horizon period.
Questions:
810.1. In regard to the historical evolution of the stress testing process, each of the following is true EXCEPT which is inaccurate?
a. The U.S. Federal Reserve conducts an annual assessment of bank holding companies (BHC) which includes a Comprehensive Capital Analysis Reserve (CCAR) and Dodd-Frank supervisory stress tests
b. The Committee of European Banking Supervisors (CEBS) oversees the most forward-looking and comprehensive regulatory stress tests in particular with respect to liquidity risks, emerging cyber-risks, and the linkage between macro and intermediate risk factors
c. The Supervisory Capital Assessment Program (SCAP) was the first of the macro-prudential stress tests of the global financial crisis (GFC); its state space had only three dimensions (i.e., GDP growth, unemployment, and house price index, HPI) and the market risk scenario was based in historical experience
d. For the 2011 European Banking Authority (EBA) test, the supervisors specified over 70 risk factors for the trading book, eight macro-factors for each of 21 countries (i.e., GDP growth, inflation, unemployment, residential and commercial real estate price indices, short and long-term government rates, and stock prices), plus sovereign haircuts across seven maturity buckets
810.2. Although the problem of coherence is generic to scenario design, which of the following elements is most likely to support the goal of designing risk factors that meet the goal of COHERENCE in a stress test?
a. Use historical scenarios
b: Exclude safe havens; aka, flight to quality
c. Use sub-additive metrics in a higher dimensional space
d. Depreciate all foreign exchange rates simultaneously
810.3. In regard to the challenges in modeling a bank’s revenues, losses, and its balance sheet over a stress test horizon period, which of the following statements is TRUE?
a. Compared to the banking book, stress testing the trading book is more difficult because it is a newer discipline
b. Implementing stress scenarios for revenues is much more developed, and easier, than stress testing for losses
c. The most robust stress tests assume loss severity (i.e., loss given default, LGD) rates that are invariant to geography, business cycle or industry and uniformly represent the worst-case scenarios
d. Regardless of whether the denominator in the capital ratio is common equity or risk-weighted assets (RWA), determining post-stress capital adequacy requires modeling both the income statement and the balance sheet over the course of the stress test horizon which is typically about two years; e.g., nine quarters for the CCAR
Answers here:
Questions:
810.1. In regard to the historical evolution of the stress testing process, each of the following is true EXCEPT which is inaccurate?
a. The U.S. Federal Reserve conducts an annual assessment of bank holding companies (BHC) which includes a Comprehensive Capital Analysis Reserve (CCAR) and Dodd-Frank supervisory stress tests
b. The Committee of European Banking Supervisors (CEBS) oversees the most forward-looking and comprehensive regulatory stress tests in particular with respect to liquidity risks, emerging cyber-risks, and the linkage between macro and intermediate risk factors
c. The Supervisory Capital Assessment Program (SCAP) was the first of the macro-prudential stress tests of the global financial crisis (GFC); its state space had only three dimensions (i.e., GDP growth, unemployment, and house price index, HPI) and the market risk scenario was based in historical experience
d. For the 2011 European Banking Authority (EBA) test, the supervisors specified over 70 risk factors for the trading book, eight macro-factors for each of 21 countries (i.e., GDP growth, inflation, unemployment, residential and commercial real estate price indices, short and long-term government rates, and stock prices), plus sovereign haircuts across seven maturity buckets
810.2. Although the problem of coherence is generic to scenario design, which of the following elements is most likely to support the goal of designing risk factors that meet the goal of COHERENCE in a stress test?
a. Use historical scenarios
b: Exclude safe havens; aka, flight to quality
c. Use sub-additive metrics in a higher dimensional space
d. Depreciate all foreign exchange rates simultaneously
810.3. In regard to the challenges in modeling a bank’s revenues, losses, and its balance sheet over a stress test horizon period, which of the following statements is TRUE?
a. Compared to the banking book, stress testing the trading book is more difficult because it is a newer discipline
b. Implementing stress scenarios for revenues is much more developed, and easier, than stress testing for losses
c. The most robust stress tests assume loss severity (i.e., loss given default, LGD) rates that are invariant to geography, business cycle or industry and uniformly represent the worst-case scenarios
d. Regardless of whether the denominator in the capital ratio is common equity or risk-weighted assets (RWA), determining post-stress capital adequacy requires modeling both the income statement and the balance sheet over the course of the stress test horizon which is typically about two years; e.g., nine quarters for the CCAR
Answers here:
