Economic Stress Testing

Economic stress testing plays an increasingly important role in credit risk management. This has as much to do with increasing regulatory requirements, for example Basel II, as with the ability to improve portfolio performance through proactive management. Our experience includes working with companies worldwide to improve portfolio performance and meet Basel II regulatory requirements.

Why Econometric Stress Testing?

Meeting Regulatory Requirements, Minimizing Losses, and Improving Return

Your portfolio's performance is shaped--at all stages in it's life-cycle--by the business cycle. Economic stress testing enables management to ask "What if" economic questions. So, what if there is an oil price spike, a housing meltdown, or a sharp increase in interest rates? How would these events, and others, impact my portfolio.

Each portfolio's performance is shaped by the business cycle in unique ways and degrees. Moody's Economy.com has significant experience helping clients explicitly incorporate the business cycle into their loss analytics (e.g. PD, LGD). Not only will each different scenario result in different macroeconomic changes, but also in timings of those changes. In addition, because each portfolio is unique, it will react differently to these changes. The graph below shows benchmark industry data under three different scenarios--the change in outcomes is dramatic.

Economic Scenarios for Stress Testing and Gross Shock Analysis

Global Country and Regional Forecasts Based On Rigorous Econometric Models

We have developed, over a number of years, large scale structural macroeconomic models of all major global economies that are internally consistent, able to forecast accurately and that can be used to generate plausible and consistent stressed scenarios involving shocks that are either global in nature or particular to individual countries or regions.

Importantly, our team of high caliber economists provides ongoing analysis of all the relevant economies. This puts us in an excellent position to understand the most likely risks that the portfolio will face going forward. Experience and on-going analysis are vital ingredients in the stress test; improperly defining and analyzing scenarios can be lead to highly unproductive outcomes.

Contact Us To Learn More

Contact us today to learn how Moody's Economy.com can help you meet your company's retail credit risk management and economic stress testing goals: