Impact Analysis and Portfolio Optimization through Simulations and Stress Tests

The Basel II Framework promotes the use of Stress Tests throughout the risk management process. A recently published Consultative Paper ("Principles for sound stress testing practices and supervision“) issued by the "Basel Committee on Banking Supervision" emphasized the importance of Stress Tests by all financial institutions, especially during the current global financial crisis.

For banks that have implemented the Internal Ratings-Based Approach for Credit Risk, Stress Tests are an integral part of the life cycle of internal Risk Rating Models. Effects on the overall lending portfolio and on key measures (e.g. minimum capital requirements) must be analyzed and identified at an early stage.

The Credit Risk Rating Platform includes an integrated runtime environment and data storage for performing simulations. Thus, operational and analytical risk management can be unified on one central platform. The CRR Platform runs simulations for rating model changes prior to deployment, and for modified ("stressed") risk factors of an internal risk rating model.

Key benefits:

• Flexible adjustments of the simulation logic by each financial institution's risk management experts within the graphical Model Authoring Platform
• Upload of simulation models without affecting operative rating models
• Execution of simulations based on the overall lending portfolio or on a subset of ratings
• Ad-hoc stress testing, which allows for the addition of new simulation scenarios
• Flexible creation and modification of Stress Testing variables (subset of all input parameters of an internal rating model)
• Graphical User Interface for setting Stress Testing variables (absolute and relative to original value)
• Reporting infrastructure to display the aggregated results of a simulation (e.g. rating distribution and the transitions of the assessments)
• Stress Testing results are a KPI for decisions related to Portfolio Optimization