Scenario Generation for Stress Testing

With the advancement of technology, banks can now develop cost effective systems which are capable of “automating” certain aspects of the regulatory compliance process – scenario generation for stress testing being one such area. The Smart Cube’s ‘Rapid Scenario Expansion Framework’ has been designed to enable banks to drive value in this area.

Shocking the equities: Rapid scenario expansion at work

Banks need to expand the limited number of supervisory scenarios provided by regulators to a much broader set of drivers for several asset classes. The process can be overwhelming as hundreds of statistically sound and regulatory compliant models have to be built. A manual and repetitive process, prone to human error, has had to be followed for different regulators around the globe.

The Smart Cube deploys its “Systematic Modelling Suite” under the Rapid Scenario Expansion Framework to generate robust macroeconomic scenarios across different regulators. In this paper, the systematic modelling suite is used for generating scenarios for the S&P 500 Index to match the severity of the supervisory scenarios of the Federal Reserve, Band of England and European Banking Authority. The implementation can help banks create reliable and cost-effective stress testing systems and solutions.

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