Conducting Stress Testing

When To Use

Designing scenario-based stress tests for portfolios, business lines, or enterprise-wide exposures
Running regulatory stress tests (CCAR, DFAST, EBA/ECB exercises) or internal capital adequacy assessments
Evaluating portfolio resilience to hypothetical or historical shock events
Analyzing concentration risk, liquidity gaps, or tail-risk exposures under adverse conditions
Preparing board-level or regulatory stress test reports with P&L impact and capital impact estimates

Portfolio data: Current positions, asset classes, notional values, maturities, counterparty exposures, and hedges
Scenario specifications: Macro variables to shock (GDP, unemployment, interest rates, credit spreads, FX, equity indices, commodity prices) with severity levels and time horizons
Historical reference events: Specific episodes to replicate (e.g., 2008 GFC, COVID-19 March 2020, 2022 rate hiking cycle, SVB contagion)
Risk factor mappings: How portfolio holdings map to stressed risk factors (betas, sensitivities, duration, convexity, Greeks)
Model assumptions: Correlation behavior under stress, recovery rates, prepayment speeds, liquidity haircuts
Regulatory parameters: Prescribed scenario variables and reporting templates if running a supervisory exercise [VERIFY: confirm applicable regulatory framework — Fed SR 12-7, EBA Guidelines, PRA SS3/21, or local equivalent]
Thresholds and limits: Capital ratios, risk appetite limits, and early-warning triggers to evaluate against results