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Stress testing

Katalysys stress testing models and tool-kits provide greater insight in to your business model and help you quantify key business risks.

Stress testing is an essential tool in the overall risk management framework. It enables banks to evaluate the impact on capital, liquidity funding and franchise viability based on potential adverse macro-economic and firm-specific scenarios. This is now a crucial element of the Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP), and Recovery and Resolution Plans (RRP) exercises.  

Stress testing

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PRA’s 2024 ICAAP Stress Test Scenarios for Non-Systemic Banks

On 27th June 2024, the Prudential Regulation Authority (“PRA”) published the ICAAP Scenarios for non-systemic UK banks, which are the supply shock scenario and the demand shock scenario. This article summarises the key factors of the scenarios and provides specific points on how small- and medium-sized banks should approach there stress testing design processes, with relation to the 2024 ICAAP Scenarios.

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Stress testing overview

Stress testing will assist banks to ask the right question about its business model, capital adequacy, liquidity adequacy and franchise viability. This enables board and management teams to gain a forward looking view of its business and identify suitable management actions in a severe and plausible stress event.

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How can we help you?

How can we help you?

Katalysys stress test models and tool-kits provide greater insight in to your business model and help you quantify key business risks. Stress testing should be used in conjunction with other risk management tools to identify measure, manage, mitigate and control key business uncertainties. The various categories of stress testing that can be done using Katalysys's k-ALM models and tool-kits are provided below:-

Business plan stress testing - helps you to evaluate a number of "what-if" scenarios and analyse the impact on Balance Sheet and Profit and Loss when preparing business plans.

Capital stress testing - helps you evaluate the impact on the bank's capital and capital adequacy due to adverse events with in the bank (firm-specific) or in the wider market (market-wide). The output from these stress tests can also be used in preparing the ICAAP, and building a robust management action mechanism to mitigate and manage the impact.

Liquidity stress testing - helps you to evaluate the impact on the bank's liquidity adequacy and funding profile due to severe and plausible stress events. The results from these stress and scenario tests can also be used in the ILAAP exercise and measure the key metrics (e.g. LCR, NSFR, survival days, refinancing requirement) against the bank’s risk appetite.

Reverse stress testing - helps you to understand the impact of scenarios that would lead to the bank's business model becoming unviable.