VRM 8. Stress Testing

Learning Objectives

1) Describe the rationale for the use of stress testing as a risk management tool.

2) Explain key considerations and challenges related to stress testing, including choice of scenarios, regulatory specifications, model building, and reverse stress testing.

3) Describe the relationship between stress testing and other risk measures, particularly in enterprise-wide stress testing.

4) Describe stressed VaR and stressed ES and compare the process of determining stressed VaR and ES to that of traditional VaR and ES.

5) Describe the responsibilities of the board of directors, senior management, and the internal audit function in stress testing governance.

6) Describe the role of policies and procedures, validation, and independent review in stress testing governance.

7) Describe the Basel stress testing principles for banks regarding the implementation of stress testing.