The Assignment
A mid-level investing bank needed to implement a stress testing framework in accordance with guidelines issued by the central bank.
Our mandate was to develop a collaborative, auditable, repeatable, and transparent stress testing program to meet regulatory expectations, inform on the bank’s risk appetite framework, and improve strategic business decisions.
Our Solution
The solution included the following key features:
1. Stress testing
Our stress testing framework comprised of regular stress tests and scenario analysis with severe macroeconomic global downturn scenarios. We included all material risk types into our stress testing exercises which included portfolio- and country-specific stress tests.
2. ICAAP
Capital plan stress testing was performed to assess the viability of the capital plan in adverse circumstances and to demonstrate a clear link between risk appetite, business strategy, capital plan and stress testing.
3. Scenario Analysis
The stress test framework also consisted of defined macroeconomic downturn scenarios which were based on quantitative models and expert judgments, economic parameters such as foreign exchange rates, interest rates, GDP growth or unemployment rates.
4. Reverse Stress Testing
Reverse stress test were to be performed annually in order to determine the severity of scenarios that would cause the bank to become unviable.
5. Risk Reporting and Measurement
The stress testing framework supported regulatory reporting and external disclosures, as well as internal management reporting, to be presented to senior management as well as to the risk committees, who are responsible for risk and capital management.
Key Takeaways for the Client
A robust stress testing framework that integrated governance, documentation, data quality management, economic scenario development, loss modeling, forecasting, and reporting and incorporated participation of all stakeholders across business units.
The framework was integrated across asset classes and lines of business and enhanced risk management and was customized to the unique strategies and risks of the bank’s portfolio
INTERNATIONAL PARTNERS
NEW YORK & INDIA
Our work in Enterprise Risk Management
The Assignment
Our client, a large manufacturing organization in the chemicals industry in India, needed to implement an enterprise-wide risk management policy to identify potential events, manage risk to be within its risk appetite, and to gain a clear view of its overall risk level.
Our Solution
As a part of an Enterprise Risk Management framework, we recommended the following:
Establishment of Risk management steering committee to establish a senior management level committee to provide oversight of the implementation of the ERM Framework.
Delineation of roles and responsibilities for risk management. These included the definition of roles for Board of directors & CEO, senior management, business units, support functions (i.e. Legal, HR, IT, etc.), Internal Audit & Compliance and risk management
Definition of ERM methodology of the company- Definitions of key risk terms, descriptions of roles and responsibilities, and clear procedures for risk identification, assessment, measurement, mitigating, monitoring, and reporting.
Risk appetite statement formalization to accommodate the client’s strategic direction and objectives and clearly outline the firm’s capacity to take risk and its tolerance for potential loss
Risk identification via risk control self-assessment (RCSA) approach; coordinated by risk management and conducted with subject-matter-experts to identify applicable risks, inherent risk levels, quality of internal controls, and residual risk levels.
Risk prioritization – The results of the RCSA for each business unit were used to prioritize key risks based on the residual risk levels
Risk mitigation plans were established by taking a risk-based approach to address the areas with the greatest control weaknesses and largest potential for loss.
Key Takeaways for the Client
· After establishment of the ERM framework, the client was able to gain a clear picture of its overall exposure to risk and improve firm-wide understanding of risks and controls.
· There was better alignment of risk appetite and strategy and more efficient use of resources.
Board and senior management oversight was facilitated wrt risk management and internal control was enhanced with the reporting results of monitoring and assessment activities, establishing a culture of risk awareness.
