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Stress Test

Stress Test Program Validation

With Banks actively engaged in Loan Portfolio Stress Testing Programs (STP) regulators are now advising institutions to have those programs validated by an outside objective third party to ensure the programs methodology is appropriate and sufficient for the subject portfolio. Whether institutions have internal STP’s or they are being performed by an outside vendor, regulators are looking for a validation of the programs none the less. CEIS Reviews has our own Stress Testing Programs Validated by an outside independent third party as well.

The Advantages of Validating a Stress Testing Program

  • To provide Bank management and the regulators an objective assessment of whether the program is structured to capture the true risk in the portfolio
  • To ensure that the program is utilizing accurate and reliable data
  • To confirm whether the program is encompassing appropriate and relevant scenarios
  • That those scenarios are well documented and that they include industry best practices and that they meet all current regulatory guidelines

Given that CEIS provides Stress Testing Programs for institutions, we have the ability to “switch hats” from being the Stress Test provider to being able to Validate a Bank’s stress test program. CEIS will draw upon its knowledge of available market data and experience in performing and validating stress test programs to asses the reasonableness of the stress testing program and to determine if the program captures the potential degrees of risk given the scenarios the bank has defined and then provide feedback and recommendations for improvement where warranted.

More specifically, CEIS will:

  • Address the Bank’s sufficiency of identified variables, parameters regarding sensitivity to variables, system or process of maintaining current information and identification of risk scenarios
  • CEIS will also evaluate the overall reasonableness of Expected Default Frequencies (EDF, sometimes referred to as Probability of Default) and Expected Recovery (ER, sometimes referred to as its inverse, Loss Given Default) derived from third party sources/models
  • Lastly, CEIS will also evaluate the back testing and other outcome analysis performed by management in order to assess the reasonableness of the stress test framework

The Stress Testing Program Validation engagement involves meetings and discussions with the Bank’s Management, a Board presentation which will outline the major findings of the exercise, recommendations based on industry best practices and regulatory guidelines, and a comprehensive and granular report.

To learn more about our Stress Test Program Validation services please contact us.