Integrating stress-testing frameworks

Publisher:
Risk Books
Publication Type:
Chapter
Citation:
Stress testing for financial institutions: Applications, regulations and techniques, 2008, 1st, pp. 3 - 15
Issue Date:
2008-01
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Bank regulators (compare Basel Committee on Banking Supervision 2006) expect financial institutions to provide sufficient Tier I and Tier II capital to cover future worst-case credit portfolio losses. These worst-case losses are based on conservative assumptions for a set of parameters such as the probability of default (PD), asset correlation, loss given default (LGD) or exposure at default (EAD) Stress of PD: probability of default is based on a one factor, non-linear model where the factor equals the 99.9th percentile of a systematic standard normally distributed variable and the sensitivity is based on the so-called asset correlation . Stress of EAD and LGD: EAD and LGD are modelled based on economic downturn conditions.
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