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A Practical Guide to
Forecasting and Stress Testing Ben Castel-Nuovo
27th - 30th AUGUST 2013
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A Practical Guide to Forecasting and Stress Testing
The aim of the presentation is to provide a practical view of the challenges in meeting both
in internal and external stress testing and scenario analysis requirements placed on a large
modern bank.
I will share we you some of our observations and experiences, tips & tricks, potential pitfalls
and impart some of our knowledge on what makes for a successful capital and impairment
forecasting modelling department. I will discuss some recent examples and define some of
the good practice rules we have found useful is the design of our modelling solutions.
I will explain how we put theory into practise to give you an insight into the current
limitations and how we might overcome them in the future.
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FORECASTING & STRESS TESTING
1. Why do Forecasting & Stress Testing ?
2. Components of Forecasting & Stress Testing
3. Modelling Approach
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WHAT IS (CAPITAL & IMPAIRMENT) FORECASTING?
1. Regulatory Capital & Impairment based on current book
2. Forecasting considers how the book is might evolve over time
3. Role of My team
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HOW DO YOU MAKE A FORECAST?
1. Scenario
2. Assumptions
3. Model
4. Forecast
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EMV MODELLING
Decompose target into meaningful sub-components that can be easily sense checked
1. Exogenous
2. Maturity
3. Vintage Maturity, Vintage & Exogenous
=
+ +
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THE BUILD PROCESS
1. Statistically Robust
2. Business Sense
3. Simple and Transparent
4. Deployable
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GOOD MODEL DESIGN
Good Book
Arrears
PD
Model Results
Inp
uts
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Good Book
Arrears
EAD
Good Book
Arrears
LGD
Inp
uts
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1St Modelling
Process
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2nd modelling
Process
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EAD Forecast
Process
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LGD Forecast
Process
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EL & RWA
Calculation
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Good Book
Arrears
EL
Good Book
Arrears
RWA
PD Forecast
Process
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Good Book
Arrears
Other Outputs
Good Book
Arrears
Inp
uts
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Blah blah blah blah blah
Blah blah blah blah blah
Blah blah blah blah
Blah blah blah blah blah
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GOOD MODEL DESIGN – PCA EXAMPLE
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THE VALIDATION PROCESS
1. Actual vs. Calculated
2. Backtest
3. Shape of the Forecast
4. Stress Test
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THE VALIDATION PROCESS – LOANS EXAMPLE
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THE VALIDATION PROCESS – CARDS EXAMPLE
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Questions?
For further enquiries on this topic or to discuss recruitment opportunities please contact me directly:
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