Mastering Operational Risk, 2nd Edition

10

Stress tests and scenarios

Introduction

What are they and what’s the difference between them?

Why use scenarios?

Problems with scenarios …

… and how to do them better

Governance

Points to consider before developing scenarios

Developing a set of practical scenarios

Preparing for the extreme event

Typical problems following scenario development

The near death experience

Applying scenarios to operational risk management data

Summary

INTRODUCTION

Stress testing and scenario analysis are essential tools for a firm’s planning and operational risk management processes. They are rooted in the firm’s business and strategic objectives and should form part of the process of identifying those objectives. They alert the firm’s management to adverse ...