Loss Forecasting and Stress-Testing

Challenge: Banks need forward-looking estimates of how their risk profile is changing as market conditions change, as well as confidence that they are ready in case of sudden adverse conditions. In order to give investors, rating agencies, regulators and stakeholders the utmost confidence that banks are prepared for changes in changes in customer conditions, macroeconomic factors or the value of their collateral, banks need models that can help them forecast possible losses and logically test their portfolio performance given specified stress scenarios. It is not enough to maintain just through-the-cycle estimates of risk, early warning indicators and the ability to predict the timing of actual losses are crucial to optimal management of a bank’s portfolio.

Solution: Based on a client’s lending profile, ERisk can help it create point-in-time estimates of Exposure at Default, Probability of Default and Loss Given Default for its customers and facilities as they vary with such dynamic factors as unemployment rates, interest rates, and housing prices. Due to a common lack of data, ERisk can use benchmark data to help banks create point-in-time estimates. ERisk can also help banks generate stress scenarios in a rigorous and transparent manner, and help banks assuage any possible regulatory concerns. ERisk will also attempt to quantify the probability with each unlikely scenarios will occur, and generate a matrix that assesses the likelihood of stress scenarios as well as their magnitude.

Benefits: These tools will allow banks to more accurately generate forecasts of losses, and pinpoint sectors of the portfolio that are at greatest risk depending on current conditions. This will allow banks to provision accurately for possible losses and take preventive action in at-risk sectors.

For more information, please contact us.

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