OSFI.Stress

Question 1

Define the term stress-testing

Answer 1

is a risk management technique
==> TO EVALUATE effects on financial condition..
==> due to SPECIFIED CHANGES in risk factors..
==> corresponding to exceptional but plausible events

Question 2

purpose of stress-testing (2)

Answer 2

• identify & control risk
• Improve liquidity management
• Support capital management
• To evaluate the financial condition of the company
• To complement other risk management tools

Question 3

Describe how stress-testing is a key risk management tool for coverage of overland flooding

Answer 3

Company won’t have historical data
==> identify flood risks using stress-testing models
==> estimate capital required to support flood risk in different scenarios
==> stress-testing could complement publicly available flood data

Question 4

Identify the 3 responsibilities of the BoD regarding stress-testing program.

Answer 4

• ultimate responsibility for program
• ensures implementation of program by management
• should be aware of key findings

Question 5

Identify the 3 responsibilities of the Senior Management regarding stress-testing program.

Answer 5

• implement & manage stress-testing program
• identify PAS (Plausible Adverse Scenario)
• develop& implement risk mitigation strategies

Question 6

Identify 4 rudimentary considerations in stress-testing.

(Hint = RUDI)

Answer 6

1. Range of perspectives & techniques
2. Update framework regularly
3. Documentation of methodology should be available
4. Infrastructure should be flexible if assumptions or methods change

Question 7

Identify the 3 considerations in scenario selection.

Answer 7

1. Comprehensive
   —>Scenarios should cover all important BUSINESS & PRODUCT lines
2. NON-HISTORICAL scenarios
   —>Events that haven’t happened but COULD happen
3. Severe & Sustained DOWNTURNS
   Includes large losses, loss of reputation, legal problems

Question 8

True or False?
It is appropriate to consider only 1 risk in stress-testing program.

Answer 8

NOT APPROPRIATE: stress-testing should consider ALL risks, not just 1 significant risk
CHANGE: consider operational risk also

Question 9

Identify the 5 focus areas in response to financial market turmoil.

Answer 9

1. Risk mitigation
2. Securitization & Warehousing
3. Reputational risk
4. Credit risk & Counter-party risk
5. Concentration risk

Question 10

Identify the 4 OSFI’s considerations in assessing stress-test program

Answer 10

APPROPRIATENESS:
- are scenarios appropriate for institution’s risk profile
VIABILITY:
- are scenarios included compromising viability
FREQUENCY:
- is stress-testing frequent enough for timely management action
SEVERE SHOCKS:
- do scenarios include severe shocks & sustained downturns

Question 11

Contrast scenario-testing with sensitivity testing

Answer 11

SCENARIO-TESTING:
- significant changes to risk factors
- observe future state including ripple effects & management actions over a longer time horizon
- more complex & comprehensive
SENSITIVITY-TESTING:
- incremental changes to risk factors
- shock is more immediate & time horizon shorter
- simpler fewer resources required