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Bank of England – Stress Testing
Ankit Shah, ACA, CFA:
ankit.shah@meritunion.com | www.meritunion.com
DISCLAIMER
The content, thoughts and representation done on this presentation is
solely the opinion of the author and should not be confused as any
interpretation or guidance thereof of any regulation. The author does
not represent any regulatory body and is not responsible for any action
or decision taken on back of anything mentioned herein. Appropriate
discretion is advised when going through the content.
Topic of content
 Scope
 Computing Stress Impact
 Liquidity buckets
 Types of Stress Tests
 Valuation adjustment components
 IB: Revenue and Costs
 AFS and FVO losses
 Exceptions to Stress Tests
Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
Which Positions are to be included?
Types of holdings included are:
 Trading Book: All positions
 Banking Book: AFS and FVO positions
Available for Sale
(AFS) Fair Value Option
(FVO)
Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
What will be the impact of Stress?
Capital
Resources
Capital
Requirements
TOTAL
IMPACT
“Relates
to losses”
“Relates to
Capital adequacy”
Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
Stress impact (continue..)
Market Risk Losses
Valuation adjustments
Counterparty Credit
Default
Revenue & Cost of IB
business
AFS and FVO Losses
Market Risk & CVA
(RWAs)
Counterparty Credit Risk
(RWAs)
CAPITAL RESOURCES CAPITAL REQUIREMENTS
Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
What are position liquidity buckets?
 For the purpose of Stress, Trading Book positions are to be classified
into following liquidity buckets:
 Liquid Positions
 Could be closed within 2 weeks
 Illiquid Positions
 Could not be closed within 2 weeks or
 Any other position specific condition which suggests illiquidity
 Structural Liquids
 Positions closed but can be re-opened for market making purpose
“Liquidity assessment as per Bank’s discretion”
Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
Types of Stress Tests! (Market Risk losses)
Risk Factor Stress Historical Stress Issuer Default Liquidity Stress
Risk factors as
defined under
‘Variable paths for
the 2015 stress test’
spreadsheet by the
BANK.
 FX Stress
 Index Stress
 Commodity
Stress
 Rates Shock
 Volatility Shock
Additional stress
based on historical
period not
sufficiently
captured by risk
factor stress.
 Asia & Emerging
markets – 2008 2nd
half
 Europe & US –
2011 2nd half and
2012 1st half
Counterparty risk
default stress:
 Portfolio-wide
default (SME
counterparties)
 Specific names
default (Large
counterparties)
Includes risk factor
stress split by
position liquidity
horizon
Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
What are Valuation adjustment components?
 Credit Valuation Adjustment (CVA) – affects in-the -money derivative
holdings
 Debit Valuation Adjustment (DVA) – captures impact of banks own
credit quality
 Prudent Valuation Adjustment (PVA) – provision for prudence
(conservatism)
 Bid/Offer Reserve – additional cost of exiting the stressed positions
Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
Investment Banking Business – Revenue and Costs
IB Revenue &
Cost info
Stressed
Scenario
Baseline
scenario
“If stressed scenario is not easily quantifiable,appropriate discretion is advised”
Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
AFS and FVO losses
 Losses to be allocated over a FIVE year period
 Positions to be re-valued each year assuming it’s the first year of
investment
 Adjustments to P&L to be made for any material change in banks business
 Default losses allocated to ONE year only.
Unrealized P&L accounting treatment:
AFS:
Shareholders equity
FVO:
Income Statement
Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
Exceptions in applying Stress Tests
INCLUSIONS EXCLUSIONS
Securities financing transactions on
Banking book
Positions with Prudential filter
FVTPL* securities in pipeline that
are: equities, bonds, loans and pre-
securitisation syndication
Securitisations and Covered bonds
Hedges to accrued loans
Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
* FVTPS – Fair value through profit and loss (part of FVO)
Ankit Shah, ACA, CFA
ankit.shah@meritunion.com | www.meritunion.com

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Bank of England StressTesting_overview

  • 1. Bank of England – Stress Testing Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
  • 2. DISCLAIMER The content, thoughts and representation done on this presentation is solely the opinion of the author and should not be confused as any interpretation or guidance thereof of any regulation. The author does not represent any regulatory body and is not responsible for any action or decision taken on back of anything mentioned herein. Appropriate discretion is advised when going through the content.
  • 3. Topic of content  Scope  Computing Stress Impact  Liquidity buckets  Types of Stress Tests  Valuation adjustment components  IB: Revenue and Costs  AFS and FVO losses  Exceptions to Stress Tests Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
  • 4. Which Positions are to be included? Types of holdings included are:  Trading Book: All positions  Banking Book: AFS and FVO positions Available for Sale (AFS) Fair Value Option (FVO) Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
  • 5. What will be the impact of Stress? Capital Resources Capital Requirements TOTAL IMPACT “Relates to losses” “Relates to Capital adequacy” Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
  • 6. Stress impact (continue..) Market Risk Losses Valuation adjustments Counterparty Credit Default Revenue & Cost of IB business AFS and FVO Losses Market Risk & CVA (RWAs) Counterparty Credit Risk (RWAs) CAPITAL RESOURCES CAPITAL REQUIREMENTS Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
  • 7. What are position liquidity buckets?  For the purpose of Stress, Trading Book positions are to be classified into following liquidity buckets:  Liquid Positions  Could be closed within 2 weeks  Illiquid Positions  Could not be closed within 2 weeks or  Any other position specific condition which suggests illiquidity  Structural Liquids  Positions closed but can be re-opened for market making purpose “Liquidity assessment as per Bank’s discretion” Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
  • 8. Types of Stress Tests! (Market Risk losses) Risk Factor Stress Historical Stress Issuer Default Liquidity Stress Risk factors as defined under ‘Variable paths for the 2015 stress test’ spreadsheet by the BANK.  FX Stress  Index Stress  Commodity Stress  Rates Shock  Volatility Shock Additional stress based on historical period not sufficiently captured by risk factor stress.  Asia & Emerging markets – 2008 2nd half  Europe & US – 2011 2nd half and 2012 1st half Counterparty risk default stress:  Portfolio-wide default (SME counterparties)  Specific names default (Large counterparties) Includes risk factor stress split by position liquidity horizon Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
  • 9. What are Valuation adjustment components?  Credit Valuation Adjustment (CVA) – affects in-the -money derivative holdings  Debit Valuation Adjustment (DVA) – captures impact of banks own credit quality  Prudent Valuation Adjustment (PVA) – provision for prudence (conservatism)  Bid/Offer Reserve – additional cost of exiting the stressed positions Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
  • 10. Investment Banking Business – Revenue and Costs IB Revenue & Cost info Stressed Scenario Baseline scenario “If stressed scenario is not easily quantifiable,appropriate discretion is advised” Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
  • 11. AFS and FVO losses  Losses to be allocated over a FIVE year period  Positions to be re-valued each year assuming it’s the first year of investment  Adjustments to P&L to be made for any material change in banks business  Default losses allocated to ONE year only. Unrealized P&L accounting treatment: AFS: Shareholders equity FVO: Income Statement Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com
  • 12. Exceptions in applying Stress Tests INCLUSIONS EXCLUSIONS Securities financing transactions on Banking book Positions with Prudential filter FVTPL* securities in pipeline that are: equities, bonds, loans and pre- securitisation syndication Securitisations and Covered bonds Hedges to accrued loans Ankit Shah, ACA, CFA: ankit.shah@meritunion.com | www.meritunion.com * FVTPS – Fair value through profit and loss (part of FVO)
  • 13. Ankit Shah, ACA, CFA ankit.shah@meritunion.com | www.meritunion.com