bank of england stresstesting_overview
TRANSCRIPT
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: [email protected] | 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: [email protected] | 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: [email protected] | 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: [email protected] | 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: [email protected] | 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: [email protected] | 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: [email protected] | 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: [email protected] | 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: [email protected] | 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: [email protected] | www.meritunion.com
* FVTPS – Fair value through profit and loss (part of FVO)
