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
The Assignment
A fund management company in Singapore wished to create a risk management policy guide to manage their exposure to various risks including market, credit, operational, strategic, liquidity and concentration risks. The fund required a framework for policies and procedures to govern the management of these risks in relation to the firm’s capital, risk appetite, earning capacity, market environment and available financial resources
Our Solution
We developed a risk management policy, to be used in conjunction with the existing policies already in place at the fund management house without superseding any existing control or guidelines already in place.
The policy outlined the investment process for private equity and for listed scrips – with investment period of medium term (3 months to 3 years) and short term (less than 3 months).
The policy delineated roles and responsibilities for the Managing Director, Head of Investments, Investment Manager, Risk and Compliance Officer and Accounts and Finance Officer with respect to risk management. The policy also prescribed guidelines on separation of functions, own account training, authentication and payment authorization and defaults.
The risk management framework defined the entire process of risk management for the client viz. risk identification, risk measurement, risk mitigation (exposure reduction, risk hedging, risk elimination), risk reporting (internal, regulatory)
Key Takeaways for the Client
The policy guide provided a strategic direction for risk management, established policies for clear delineation of risk governance and spelled out responsibilities for identification, measurement, analysis, control, monitoring and reporting of the various risks encountered by the management house in its business activities.
The risk management framework outlined by the policy guide augmented the existing risk management framework of the house to better align it with the scale of the business operations of the various fund clients that the fund house managed and also achieved full compliance with the regulations of Singapore, where the fund house was based.
How we created a Risk Management Framework
for a Fund Manager in Singapore
