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Stress and Scenario Testing: CP08/24 ISDA/PRMIA risk seminar, 10 February 2009 Rory Vaughan Wholesale and Prudential Po PowerPoint Presentation
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Stress and Scenario Testing: CP08/24 ISDA/PRMIA risk seminar, 10 February 2009 Rory Vaughan Wholesale and Prudential Policy Division Financial Services Authority. Agenda. Outcomes Background Policy proposals in CP08/24 Next steps Discussion. Outcomes.

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Stress and Scenario Testing: CP08/24

ISDA/PRMIA risk seminar, 10 February 2009

Rory Vaughan

Wholesale and Prudential Policy Division

Financial Services Authority

agenda
Agenda
  • Outcomes
  • Background
  • Policy proposals in CP08/24
  • Next steps
  • Discussion
outcomes
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
Background
  • Concerns about quality of stress and scenario testing
  • Northern Rock internal audit report
  • FSA work
  • Industry reviews
  • International work
fsa 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 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
Policy proposals in CP 08/24
  • Reverse-stress testing
  • Capital planning stress
  • Other S&S testing policy clarifications
reverse stress testing
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
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
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:
    • 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
Other S&S testing policy clarifications
  • Pension obligation risk
  • IRB quantification
  • Group risk
  • Market risk
  • Interest rate risk in the banking book
  • Securitisation risk
next steps
Next steps
  • Continued industry engagement during consultation period
  • High-level industry group
  • Policy Statement – Q3 2009
  • Policy implementation

This presentation is the property of FSA. It may only be downloaded for personal or individual use. It may not be disseminated or otherwise reproduced without the prior consent of the FSA.

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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