Stress Testing

Economic stress testing allows portfolio managers to understand the sensitivities of their portfolios to significant economic change and the implications for provisioning, capital allocation and regulatory compliance. Basel II and III mandate certain portfolio stress tests alongside prescriptions for capital approaches.

When developing methodologies for stress testing, it is vital to ensure that any programme adequately addresses a range of economic scenarios for both regulatory and managerial purposes. Experian helps organisations develop these scenarios using a unique combination of economists and credit risk consultants.

Rather than using generalised macro economic assumptions, Experian’s extensive and detailed economic models allow alternative scenarios to be defined explicitly, which impact local economic and household factors. This in turn identifies economic impact on probability of default and loss given default at an account level.

These scenarios can include:

• PRA anchor scenario
• Client-developed severe stress scenarios, including: Severe house price declines in South East of England, triple dip recession, significantly higher interest rates and eurozone depression

Our approach

Experian’s consultants build customised models linking client account level portfolio data on probability of default, exposure at default and loss given default to baseline and alternative economic scenarios. Experian also have extensive experience of building risk, component (PD, EAD and LGD), and capital requirements models, taking account of both economic and non-economic factors. These models are designed and implemented to maximise value to clients whilst ensuring regulatory compliance. Experian also have extensive experience of building risk.

The economics consultancy team tailors Experian forecasts to cover a wider range of industry sectors, produce occupations and skills forecasts or forecasts for non-administrative boundaries like catchment areas or postal geographies.

Deliverables

• Customised stress tests
• Calibration services to incorporate macroeconomic variables in existing models
• Stress testing and loss forecasting models
• Stress tests and alternative scenarios for commercial and consumer portfolios
• Fully documented and transparent models and methodologies from an independent source to meet regulatory requirements

Experian’s comprehensive approach enhances the ability of credit risk professionals, portfolio owners and regulators to stress test portfolios. We help them evaluate how portfolios will withstand different economic scenarios for both internal financial budgeting purposes and to meet increasingly demanding regulatory requirements in a coherent and transparent way.