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Discussion on the pressure test application in risk management of commercial banks

Author: CaiYanHua From: www.yourpaper.net Posted: 2010-06-09 18:01:09 Read:

Abstract: pressure test is an important method to measure financial institutions with potential losses by some exceptions but possible event causes, it is the auxiliary tool VaR method to measure the market risk of financial assets under normal conditions, is the basis for the implementation of IRB banks "proposed by the new Basel capital" the agreement.In this paper, the function and significance of pressure test as the starting point, focuses on the analysis of the stress testing method, some policy suggestions for China's commercial banks to carry out the tests suggested.
Keywords paper: pressure test; commercial bank; risk management of

Commercial bank is a special enterprise monetary fund, its operation process is of all kinds of risk identification and measurement, accurate and timely monitoring and early warning and effective control of the process.From a global perspective, dramatic changes in economic and financial environment has changed the bank's operating environment, increasing the risk of the banking business, but also promote the integration and unification of global banking supervision and risk management framework.In the comprehensive risk management system, the bank should not only accurately quantifying and monitoring facing the process of business credit risk, market risk, operational risk and liquidity risk, but also must make the risk control of financial market risk change always maintain a high degree of sensitivity.Therefore, "the new Basel Capital Accord requires banks to establish" in various rating model (IRB method such as measure of credit risk and the market risk VaR method), also should use the pressure test (stresstesting) to assess changes in amplitude of portfolio value.
, the function and significance of pressure test
According to the international organization of securities regulators (InternationalOr-ganization of Securities Commissions, IOSCO) (1995) the provisions of the relevant documents, the pressure test is the most unfavorable market conditions (such as interest rates suddenly rise or the stock market suddenly plunge) method for analysis of the effect of portfolio; the relevant documents of Basel Committee will be defined by potential method loss to measure by some exceptions but likely events caused by financial institutions.Specifically, essence pressure test is the acquisition of big changes in the price or price change information, which is applied to the portfolio and to quantify the potential gains and losses.
The pressure test is mainly VaR (ValueatRisk, value at risk) tool, you can make up for deficiencies in the application of the VaR:
One is in the practical application, just use VaR to measure the market risk is not appropriate.For risk control and management, in addition to considering the possible loss of normal circumstances, more importantly must ensure that in the extreme condition of city square, financial assets not held by financial institutions to the institutions of the risk of bankruptcy.VaR is unable to estimate such risks, but through the pressure test, you can find the financial institutions for the extreme market conditions bear ability.
The two level of probability is selected, VaR estimation is computed in a certain probability level values, for example, in 250 days, if the probability that confidence intervals for 99% days set, loss of greater than VaR should be between 1 days to 2 days, the confidence interval is lower, more than the number of days will more.But, even if we known loss greater than the possibility of a very small amount, but if the small probability event of the loss, and the consequences later to involve the sustainable management problems, then the consequences could be identified, measured and effective prevention, becomes very important.
The three is to estimate the volatility and correlation.VaR estimates, usually of the volatility and correlation of historical data.To estimate the VaR using the historical data, may not be able to truly reflect the market risk, especially in the macro economic major changes or is the market behavior changes, VaR may be seriously underestimated the market risk problem.
Four is the question of relations with other risk.VaR does not consider other risks, such as credit risk, liquidity risk.Normally, when a problem of liquidity, liquidity risk will increase the market risk, but VaR cannot reflect such risks.
In view of this, the Western banks of various countries widely used pressure testing mutations may occur in response to the market, through asset allocation, credit and asset of term structure of interest rate adjustment, to guard against all kinds of financial risk.
The analysis method, the stress test of two
1 validation data integrity, accuracy and real-time performance of
In the formal stress tests, banks must determine the correctness of the related data, due to the bank every 13 portfolio will change, so the investment quantity, price, need to confirm, whether changes faster trading account (Tradingbook) or change the slower bank account (Bankingbook) required for the test; data in addition to measure the market risk factors (such as interest rate, exchange rate) and other risks (such as data transformation matrix is also very important to verify the work).
2 for portfolio risk analysis and scenario events related to the establishment of
Stress testing is a method of risk management, so we should first confirm the test area will be to conduct stress tests, the analysis method of different assets will be different.The portfolio is determined, we can observe the market, economic change, find out influence events pressure test the portfolio of assets, financial institutions can use internal or external consultants, the establishment of pressure right, due to the pressure of the real situation is unknown, so as much as possible to build several stress situations analysis.For example, for a commercial loan, the potential loss of its influence will be sales revenue of enterprises decreased, the level of interest rates rise and the decline in value of the collateral.We can analyze the following scenario:
(1) sales revenue of enterprises decreased by 20%, the value of the collateral has shrunk to 50%, what is the potential loss of the credit assets.
(2) the level of interest rates doubled, while the value of collateral falls 50%, what is the potential loss of the credit assets.
(3) sales revenue fell 20%, collateral value has shrunk to 50%, at the same time, the level of interest rates doubled, how much is the potential loss of the credit assets.

3 the definition of each risk factor
In determining the various stress scenarios, another important step is to determine the risk factors.Including credit risk factor of bank common:
(1) the counterparty risk -- this section contains the default rate (probabilitydefault, PD), loss given default (1ossgivendefault, LGD), default exposure amount (exposureatde.fault, EAD) three major risk factor.In addition, the early repayment of the borrower will lead to investment risk, so the maturity is also considered as a risk factor.
(2) the overall economic variables of macroeconomic factors -- the rate of economic growth, the unemployment rate or price index will have effect on the portfolio of assets can be regarded as a risk factor.Other related industry and market, area of the political or economic factors also can be regarded as a risk factor.
(3) the market risk factor -- banks holding bonds or securities and other financial products, also will face the market and credit risk, a pressure events generated on such products belong to the market risk and credit risk, it is difficult to distinguish, so in the pressure test, will also be measured for the two risk factors.
(4) -- in general risk model in other types of risk factor assumptions, often have many, in the pressure test, it should be to relax the assumption to estimate.In addition, in the risk model is often used to portfolio risk data as the intermediate data, such as the transformation matrix, the stress tests, but also as a risk factor for measurement.The correlation between assets will also affect the size of the risk value, such as high quality bonds (government bonds) and the low quality of the bond (bond) in normal market, at the same time will be affected by the interest rate volatility created, so the correlation is very high, but when the market crisis, the market will trend goods of high quality, and between the two but will have more correlation coefficient of 1.These will be structural changes and the portfolio will have the effect of variables, we must be taken into account.
4 pressure test
Method for pressure testing, can be divided into two categories:
(1) the sensitivity analysis (sensitiveanalysis) and
This method is using a particular risk factors or to a group of risk factors, the factors identified in the implementation of the extreme changes in the range of variation, analysis of the impact of asset portfolio, its effect on.The advantages of this method is easy to understand the risk factors in the extreme change possible, every change for the total effect of asset portfolio effect and the marginal effect, the weakness is the executor for each gradually changes and scope of the must is very appropriate, otherwise it will affect the results of the analysis and judgment, especially for nonlinear return rate of portfolio, this situation will be even more significant.
(2) scenario analysis (scenarioanalysis) and
A group of risk factors is defined as a situation, analysis of pressure loss in individual situations, therefore this method is called the scenario analysis.There are two kinds of scenario analysis: analysis of the historical event design method of scenario analysis and hypothetical scenarios.
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