Course description
Bank Stress Testing
An in-depth workshop on bank capital stress testing, applying both econometric and fundamental stress models to the major retail and corporate banking credit risks, as well as stressing market and operational risks.
The stress testing models that are developed during the course can be used for banks’ Pillar 2 Internal Capital Adequacy Assessment Process (ICAAP) and Supervisory Review and Evaluation Process (SREP), as well as for external, supervisor-driven and investor-driven stress tests.
Throughout the programme participants develop the different modules of a stress test of a large bank, culminating in a complete stress test model. Case studies explore various approaches from a number of European, US and Asian banks.
Upcoming start dates
Who should attend?
The Bank Stress Testing course is beneficial to those involved in the financial sphere particularly professionals in the following areas:
- Stress testing staff at banks
- Capital management staff
- Treasury/ALCO staff
- Quants
- Risk management staff
- Senior management
- Bank supervisors and resolution authorities
- Bank equity and credit analysts and portfolio managers
Training content
Day One
Stress Testing Motivation And Applications
- What is stress testing – capital vs liquidity stress testing?
- Motivation for stress testing – internal vs external supervisory and external investor purposes; business-as-usual vs stressed conditions; bottom-up vs top-down
- Stress tests as a comprehensive and fully integrated, quantitative health assessment of banks as distinct from partial CAMEL-based approaches
- Role of stress testing in Internal Capital Adequacy and Assessment Process (ICAAP), Supervisory Review and Evaluation Procedure (SREP) and setting of Pillar 2 capital requirements, as well as in business planning
- Banking system-wide stress tests, both in business-as-usual and stressed conditions. The increased role of external stress tests post crisis
Stress Test Model Building Blocks
- Understanding and modelling pre-provision operating profits
- Understanding loan loss and other asset provisioning
- Understanding and modelling the balance sheet
- Understanding and modelling regulatory capital
- Linking the income statement, balance sheet and regulatory capital models
Case Study: Setting up the stress test model for Lloyds Banking Group Plc
Loan Loss Provisioning
- Non-performing exposure and forbearance loan definitions – threshold criteria; entry and exit; borrower group perimeter. Definitional differences across banks
- Understanding loan losses – loan loss provisions, loan loss reserves, write-offs and recoveries
- Loan loss provisioning under IAS 39 vs IFRS 9 – moving from an incurred loss model to an expected credit loss model
Case Study: Loan loss provisioning at Lloyds Banking Group Plc
Workshop 1: Setting up the stress test model for Banco Santander SA
Performing The Capital Stress Test – Retail Lending
- Stress scenario construction and choice of stressed capital threshold
- Segmenting the loan book
- Linking macroeconomic and bank-level variables. Peer benchmarking
- Econometric techniques for stress testing
- Stressing loan loss provisions for retail portfolios – residential mortgages
- Stressing loan loss provisions for retail portfolios – consumer finance
- Failed bank historical data – sanity check
Case Study: Stressing the Retail and Consumer Finance divisions at Lloyds Banking Group Plc
Workshop 2: Stressing retail and consumer finance lending at Banco Santander SA
Day Two
Performing The Capital Stress Test – Corporate/SME Lending
- Stressing loan loss provisions for corporate/SME portfolios
- Stressing identified problem segments. Examples – commercial real estate (CRE); commodities
- Failed bank historical data – sanity check
Case Study: Stressing the Commercial division, including CRE, at Lloyds Banking Group Plc
Workshop 3: Stressing corporate/SME and CRE lending at Banco Santander SA
Performing The Capital Stress Test – Market Risk And Operational Risk
- Stress testing market risk
- Stress testing operational risk
Case Study: Stressing market and operational risk at Lloyds Banking Group Plc
Performing The Capital Stress Test – Completing The Test
- Inputting stressed loan loss provisioning results into the stress test model
- Interpretation and application of capital stress test results
- Reverse stress tests
Case Study: Completing the stress test – Lloyds Banking Group Plc
Workshop 4: Completing the stress test – Banco Santander SA
Stress Test Case Studies – External Supervisor-Driven
- ECB/EBA Comprehensive Assessment of EU banks, 2014
- ECB/EBA EU bank stress test, 2016
- US Federal Reserve Comprehensive Capital Analysis and Review of US banks, 2015
- Bank of England UK Bank Stress Test 2015
- Central Bank of Ireland/BlackRock Solutions Financial Measures Programme encompassing Prudential Capital Assessment Review of Irish banks, 2011
- Oliver Wyman Asset Quality Review and Stress Test of Spanish banks, 2012
Stress Test Case Studies – ICAAP
- EBA’s Draft Guidelines on Stress Testing and Supervisory Stress Testing (for ICAAP and SREP)
- Stress testing in ICAAP at Barclays Plc
- Stress testing in ICAAP at Banco of America Corporation
- Stress testing in ICAAP at DBS Group Holdings Ltd
Stress Test Case Studies – Investor-Driven
- Stress testing Chinese banks – Industrial & Commercial Bank of China Ltd; Bank of China Ltd; China Construction Bank Corporation; Agricultural Bank of China Ltd
- Stress testing Standard Chartered Plc
- Stress testing HSBC Holding Plc
- Stress testing Banca Monte Dei Paschi di Siena SpA
Course delivery details
Courses are delivered in the London classroom and live online via LFS Live in London, New York, and Singapore time zones.
Please contact LFS for more details.
Certification / Credits
Learning Objectives:
- Build a complete bank capital stress test model, encompassing both econometric and fundamental models of retail and corporate credit risk, market risk and operational risk
- Learn how to apply the model for any of Internal Capital Adequacy Assessment Process (ICAAP), external supervisor-driven stress tests or investor-driven stress tests
- Review the various approaches taken by different banks and supervisors in their capital stress testing, from a range of European, US and Asian banks
London Financial Studies is registered with CFA and GARP Institute as an Approved Provider of continuing education programs. GARP & CFA Institute members attending this course are eligible for 16 CE/CPD credits.
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London Financial Studies - Capital Markets Executive Education in the USA
Global markets move quickly, evolving continuously and deepening in complexity. Over the past decades London Financial Studies has provided specialist executive education programs and short courses focused exclusively on global capital markets. Preparing only the highest quality and most relevant...
A very good course both for those who are new to stress testing and those who are actually involved in the calculations.