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 Operational Risk Management
The Assignment
The client, a mid-sized bank, retained our services for the establishment of an operational risk management framework.
Our mandate was to establish an operational risk management process that would result in identification analysis, monitoring, mitigation of operational risk at business level and also establish an analysis and reporting line to senior management so that they have adequate knowledge of the current operational risk profile.
Our Solution
Implementation of the operational risk framework entailed the following: Formulation of Management policies including Operational Risk Management Policy, Risk & Control Self-Assessment Policy, Training & Communication Strategy, Outsourcing Policy, Business Continuity policy, disaster management policy, System security Policy, New activities & product policy,
Definition of Governance structure with defined roles for Board of directors, Senior Management Committee, Chief Risk Officer, Risk Management committee, operational risk management department, Business Unit Head, Business Unit Controller, Financial Planning & Control, Compliance and Internal Audit
Definition of risk Entities, operational risk classes, categorization logic of events, operational risk management cycle, culture profile & Self risk assessment, risk Issue assessments, risk status and action plans.
Strategic risk diagnostic exercise to confirm business objectives, assess significance and certainty of business objectives, identify risks which threaten achievement of business objectives, identification of most risky areas of business by geography, line of business and processes.
Key Takeaways for the Client
· Firm-wide definition of how operational risk is to be identified, assessed, monitored and controlled/ mitigated
· Appropriate definition of operational risk that clearly articulated what constitutes operational risk in the bank
· Bank’s risk appetite and tolerance for operational risk
· Outlines for bank’s approach to identifying, assessing, monitoring and controlling/mitigating risk.
Risk RCSA policy for describing business activities, processes, risks and controls, monitoring and testing the controls, assessing the control and reporting results of monitoring and assessment activities.
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
