Simulations and Stress Testing
For banks that have implemented the Internal Ratings-Based Approach for Credit Risk, simulations and stress tests are an integral component of the life cycle of internal risk rating models. The effects of changes to the model on the overall credit portfolio and on key measures (such as minimum capital requirements) must be identified and analyzed at an early stage.
The Credit Risk Rating Platform (CRRP) embodies an integrated runtime environment and data storage for performing simulations. Thus, operational and analytical risk management can be performed on one central platform. The CRRP can simulate changes to a rating model prior to deployment, as well as evaluate modified ("stressed") risk factors of an internal risk rating model. The impact of model changes and stress scenarios can also be measured in terms of modified Risk-Weighted Assets (RWA) and Regulatory Capital (RC) requirements.
Simulations of Modified Rating Models
- Flexible adjustments to the rating logic for simulation purposes can be made by the rating experts within the graphical Model Authoring Platform
- The upload of rating models for simulation will not affect operative rating models
- Simulations can be based on an entire historic credit portfolio or on a subset of data
- Reports can display the aggregated results of a simulation (e.g., rating distribution and the transitions of the assessments)
Simulation of Changing Risk Factors
- Flexible definition and modification of stress testing variables (any subset of all input parameters of an internal rating model)
- Ad hoc stress testing allows for additional simulation scenarios
- The setting of stress testing variables (e.g., absolute and relative to original value) can be done in a web-based user interface
- The implementation environment permits the recalculation of rating results (e.g., Probabilities of Default) in a stress scenario
- Reports present the results of stress tests (e.g., historic rating class distribution compared to the distribution in a stress scenario)
RWA and RC Calculation
- The CRR Platform can calculate both modified risk weights (RW) and risk-weighted assets (RWA)
- RWA calculations can be performed as part of simulations and stress tests
- Aggregation of risk-weighted assets (RWA) for Regulatory Capital (RC) calculation
- Maintenance of RWA-calculations is done in the Model Authoring Platform
Maintenance of RWA Calculation in the Model Authoring Platform
- Basel II-compliant database and interfaces for risk rating software
- © Innovations Software Technology 2010
- Imprint
- Legal Restrictions
- Sitemap