Embed Size (px)
Citation preview
Stress Testing - Building Societies
FSA CP09/17 – June 2009
Menelaus Consulting Ltd
Craig Alexander
Agenda
§ FSA Requirementso Lending Approaches (BSOCS1.11 – 1.14)§ Requirements for Stress Testing
o Stress Testing Definition (BSOCS5.57)
§ Menelaus Consulting Ltd o Solution
oOngoing Support
§ Next Steps
FSA Requirements – CP09/17
§ CP09/17 “A Specialist Sourcebook for Building Societies: Enhanced supervisory guidance on financial and credit risk management”§ Supervisory requirements for building societies in
the headings of: o Lendingo Liquidityo Fundingo Financial Risk Managemento Business Model Diversification
Lending Approaches – BSOCS1.11-1.14
Lending Approach BSOCS Stress Testing Required
Traditional 1.12 Simple stress testing (e.g., changes in security values based on appropriate HPI movements) undertaken on a semi-annual basis, or more frequently if conditions warrant
Limited 1.13 Stress testing and scenario analysis (at level of individual asset pools) on quarterly basis
Mitigated 1.14 Econometric analysis and full stress testing /scenario analysis on at least quarterly basis
Stress Testing – BCOBS5.5.7
§ “The risk measurement systems put in place should evaluate theimpact, on income or economic value as appropriate, of abnormalmarket conditions. The amount and type of such stress testing requiredwill depend upon the sophistication of treasury operations undertaken,and the level of risk taken, but where required should be regular andsystematic. Within the range of scenarios tested, it is good practice forthe scenario to reflect the events that would cause the society’sbusiness model to fail without any mitigating management action. Thisprovides the benchmark. Boards and management should, periodically,review the extent of such stress testing to ensure that any “worst case”scenarios remain valid. Contingency plans should be in place to dealwith the consequences should such scenarios become reality.”
Menelaus
§ Menelaus Consulting Ltd – established 2007
§ Founded by treasury and risk professional and economist to provide expertise specific to the building society community niche market
§ Provides “fair trade” approach to modelling and management of risk management approaches to treasury, liquidity, funding and credit risk
Previous Clients
• Menelaus staff have worked previously with:
Menelaus – Stress Testing Solution
DATA INPUT§ Portfolio variables
o Dates§ Disbursement date§ Observation date
o Product§ Type (repayment / interest)§ Rate
o Amounts§ Purchase price§ Balances
o Property§ Type and style § Location
MENELAUS INPUTS
§ Stress input variableso UK econometric§ Hazard rates
§ Redemption rates
o Macro-portfolio§ Depreciation factors
§ (Quasi) LGD inputs
o Funding / liquidity§ Cost of funding
§ Discount rates
Menelaus - Outputs
§ The forward-looking outputs from the Menelaus process are as follows:o Probability of possession on loan-by-loan basis
o Probability of loss on loan-by-loan basis
o Loss rate on loan-by-loan basis
§ This helps by being able to describe simply how the effect of recessions of various severities impact the loan portfolio
Menelaus - Advantages
§ The advantages to this for the Society are :o Simplicity
o Reduced data set requirements
o Choice of scenarios § Stress
§ Shock
§ Combined
o Known time-series and limitations
o Ready-to-use outputs
Menelaus – Differences
• Simple – Our service offering is readily adjustable, by you
• High speed– Project duration <10 working days
• Low cost– We believe in offering low-cost answers
• Easily replicable – When we leave, you can replicate our work
