This paper proposes an integrated risk-management framework that includes:1) measuring the risk of credit portfolios, 2) implementing a (macro) stress test, and 3) setting risk limits using the estimated systematic latent factor specific to capture the housing market cycle. To this end, we...

Regulatory capital for trading book positions includes two components that cover different risks but apply to the same portfolio, one for market risk and one for credit risk. Similar approaches are common in banks’ internal models for economic capital. Although it is known that joint market...

We present a stochastic simulation forecasting model for stress testing that is aimed at assessing banks’ capital adequacy, financial fragility, and probability of default. The paper provides a theoretical presentation of the methodology and the essential features of the forecasting model on...

In the wake of Basel II, stress tests are recommended by most central banks, for their supervisory review process. However, most of these tests fail to consider the probability of occurrence of the shocks. Using data on USD-INR and GBP-INR between January 2000 and February 2001, we couch stress...

EU legislators mandated the European Banking Authority to propose a stress scenario methodology for capitalising non-modellable risk factors (NMRF) as foreseen under the Basel Fundamental Review of the Trading Book (FRTB) rules for market risk. In this paper, we present the foundations of such a...

We enhance the method of integrating scenarios proposed in Ergashev (2012) into risk models. In particular, we provide additional theoretical insights of the method with focus on stress testing Value-at-Risk models. We extend the application of the method, which is originally proposed for...

This paper incorporates uncertainties of model risk in a stress scenario for house prices. Our approach consists of mapping the Gaussian (or other alternative) distribution quantiles to the quantiles of the empirical distribution using a statistical criterion. The mapping corrects for the...

Operational risk management and measurement has been paid an increasing attention in last years. The main two reasons are the Basel II requirements that were to be complied with by all international active financial institutions by the end of 2006 and recent severe operational risk loss events....

Forecasts, models and stress tests are important tools for policymakers and business planners. Recent developments in these related spheres have seen greater emphasis placed on stress tests from a regulatory perspective, while at the same time forecasting performance has been criticized. Given...

Supply chain scenario planning – Coronavirus synopsis questionsSupply chain resilience, contingencies, and business continuity plansHistoric case study of high dependency on the region and the inappropriate spread of manufacturing load. Contingency planning to address business continuity...