Internal Stress Tests : Governance framework and P&L modeling

The client conducts yearly global internal stress tests as part of the management of its activity and contributes to Group-level exercises. The financial management department oversees the entire exercise and is responsible for the modelling and simulation of certain components of the income statement. The client was looking to use an external firm to accompany it in the coordination work of this campaign as well as to take charge of the production of the stressed trajectories of the P&L. In coordination with its holding, the institution was looking to carry out this campaign with the following main objectives:

• To present an internal stress test better integrated into the budget
• To be able to present models to the regulator in accordance with the macro-economic scenarios defined globally for the bank, on the indicators constituting the P&L

APPROACH AND SOLUTION

It was in this context that Avantage Reply was requested to provide subject matter expert support to ensure the proper preparation and implementation of the various P&L stress tests models and to prepare the framework and implementation of the global governance of stress tests. These different streams included the following works:

• Provide expert support on all modelling aspects of stress tests (Net trading income, fees and commission)
• Independent overview of the scenario and their calibration (nature and number, severity, plausibility…)
• Ensuring autonomy to conduct the various work and iterations with the various key contributors to the ST process
• Creation of working groups and proposal of solutions to solve the problems involved in stress
• Provision of the audit trail of the elements integrated in the stressed trajectories of the P&L
• Implementing a framework and governance for internal stress tests
• organisation of project (weekly) and steering committees (monthly), including preparation of materials and reports
• Ensuring review and construction of methodological documentation
• Consolidated impact summary table for presentation to Management Committee

RESULTS AND BENEFITS

At the end of the intervention, the overall process could be carried out, without too many major difficulties, while ensuring the identification of areas for improvement in terms of methodologies or processes. In addition, Avantage Reply has delivered a global package on P&L component models and simulations and a gap analysis on the current governance framework.