LIQUIDITY STRESS TEST FRAMEWORK - DESIGN AND IMPLEMENTATION

Avantage Reply supported a European GSIB with the design and implementation of a liquidity stress testing framework to comply with the Group minimum standards, and integrate outcomes into the liquidity risk management and risk appetite.

THE CHALLENGE

An ECB on-site inspection on the Funding and Liquidity risk management framework was conducted at Group level of a large European GSIB with retail and private banking activities. This mission led to a set of findings and recommendations on the overall framework and in particular on the Liquidity stress testing framework. To address the outcomes of this inspection, the Group has defined a remediation plan on the latter to be deployed in all subsidiaries with the objectives of setting up minimum standards. To this end, the Group has deployed a set of working materials to its entities to develop local liquidity stress testing process consistent with their business model.

APPROACH AND SOLUTION

The mission has started by conducting an in-depth gap analysis at the local level to determine the business model, the funding and liquidity profile of the Bank and also the main risk drivers of the balance sheet. This preliminary analysis was necessary for the second steps to define the critical components of the liquidity stress testing framework:

• Risk driver mapping and analysis leveraging on the maturity ladder report and various sensitivity and historical analysis.
• Define and implement a set of idiosyncratic, market and specific scenarios, including appropriate shocks levels par key risk drivers.
• Introduce various levels of speed propagation per scenario.
• Simulate the outcomes of the stress tests exercise on key liquidity metrics such as Net Liquidity Position and Survival horizon with and without management actions.
• Implement the overall governance and process for strategic steering purposes.
• Draft of all the documents of the stress testing process and all the presentations of the ALCO and the Executive committees.

RESULTS AND BENEFITS

The completion of the project allowed the local entity to comply with group requirements and minimum standards. For this, our assignment has been completed through the design and the implementation of all the critical steps of a liquidity stress testing framework. Moreover, the implemented process is now well-established and integrated into internal liquidity risk management and steering through the risk appetite and appropriate limits.