Chapter FourStress-Testing OpRisk Capital and the Comprehensive Capital Analysis and Review (CCAR)

4.1 The Need for Stressing OpRisk Capital Even Beyond 99.9%

Since the Lehman Brothers collapse that culminated in a financial crisis in 2008, banks across the globe have been constantly demanded by regulators, investors, lawmakers, and the public in general to prove their financial health and resilience of their balance sheet under stressed financial conditions. In order to standardize and formalize this process, more formal tests were established by the leading world regulators, which periodically require banks to stress-test their capital base given certain scenarios. On both sides of the Atlantic, this process is similar to that shown in Figure 4.1. It basically requires a firm to develop a set of scenarios or use scenarios developed by the regulators. Regulators would then get the individual results from firms and develop their own systemic stress test to verify if the financial industry can withstand negative scenarios and where regulators need to enforce banks to avoid another situation like the one in 2008.


Figure 4.1 Generic stress test framework

These scenarios are expressed in stressed macroeconomic factors and financial indicators, and regulators provide these figures on a quarterly basis for a period of 2 or 3 years ahead. For example, in a certain quarter, regulators ...

Get Fundamental Aspects of Operational Risk and Insurance Analytics: A Handbook of Operational Risk now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.