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GARP
Agenda
GARP
What is the risk appetite of the firm i.e. what is the level of loss
the firm is willing to take under stressed markets?
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11
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14
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16
17
18
19
20
4. Current Practices
174
116
P
ro
pe
rty
(1
8)
t(5
2)
32
C
re
di
FX
(4
5)
C
om
m
od
iti
es
(2
3)
37
O
th
er
s(
28
)
130
E
qu
iti
es
(4
9)
In
te
re
st
R
at
es
(6
0)
400
350
300
250
200
150
100
50
0
21
66
Historical
Hypothetical
O
th
er
P
ro
pe
rty
C
re
di
t
FX
C
om
m
od
iti
es
E
qu
iti
es
IR
Sensitivity
22
Scenario By Regions
100%
80%
Sensitivity
60%
Hypothetical
40%
Historical
20%
0%
N.
America
Europe
Japan
Asia
Emerg
Mkts
23
4. Current Practices
Key Points of BIS Survey
Senior management seems to be engaged in 12 month period ,
123 one-off scenarios were requested
Most Common historical scenarios used Terrorist attack (9/11),
Black Monday 1987, Asian Financial Crisis 1997 (currency
devaluation and credit deterioration), Bond Market crisis 1994 and
Russian Default 1998.
Sensitivity testing most common for interest rates and credit
markets, less so for Equity and FX. Equity shocks are asymmetric
towards crashes. FX shocks are in both directions.
Market risk stress tests are most advanced. Need to develop
robust stress test framework for credit risk
Integration of market and credit risk remains an issue.
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5. Regulatory expectations
US banking supervisors have not mandated use of
specific set of scenarios
Stress tests should be both qualitative and quantitative
in nature
Incorporate both market risks and liquidity aspects of
market disturbances
Stress tests should be run on a periodic (at least
monthly basis)
Roles and responsibilities should be reflected in policies
set by management and board of directors
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6. Best practices
Senior management actively involved in design and use
of stress testing as an effective risk management tool
Frequent running of stress test reports (daily/weekly)
Periodic review of stress scenarios
Risk tolerance based on stress scenarios and full
revaluation used
Customized scenarios pass reality check and are
relevant to risk exposures and business strategy
Reports tailored to the audience (desk/business/
corporate level)
Comprehensive integration of market and credit risks
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7. Challenges ahead
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30