KnowCo Stress Testing

Governance, Risk & Compliance Applications
The KnowCo Stress-testing and Business Modelling
Application
Overview
The KnowCo Stress-testing application (‘KST’) is designed to
Reduce the significant and fast-growing workload on risk and compliance professionals
involved in business planning and stress-testing
Reduce reliance on user-developed spreadsheets by storing data, scenarios and output
securely, in a controlled production environment
Empower banks to fulfil all regulatory and best practice expectations, including the most
recent Basel standards1
Take data from any stable source at any level of granularity
Enable Reverse Stress-testing, using multiple variables
Enable the necessary harmonisation between credit, earnings-at-risk and liquidity
stress-testing (for example recessionary scenarios and credit concentration scenarios)
Support the user in business modelling activities (e.g. for ICAAP)
Support the implementation of Recovery and Resolution Planning.
Users can model and perform stress tests for any, or any combination, of:
Liquidity Risk
Interest Rate Risk (IRRBB)
Credit Risk Pillar 1 Capital
Credit Risk Pillar 2A Capital
Business Modelling and Planning.
Users can produce a set of risk profile metrics and reports for day to day risk management
and in addition are able to drill down into more detailed information contained within these
reports.
To further support compliance and for best practice risk management standards, we have
developed the following additional applications that complement KST:
1
E.g. BCBS Working Paper No. 24 Liquidity stress testing: a survey of theory, empirics and current
industry and supervisory practice
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April 2014
The KnowCo Stress-testing Application (KST)
The KnowCo Funds Transfer Pricing application (‘KFTP’). This application has been
developed to support compliance with UK and European standards and best
international practice (see http://www.knowco.co.uk/kftp).
The balance sheet risk management tool (BSRM) which enables integrated stresstesting and business modelling for ICAAP and viability in cognisance of regulators’
emphasis on this aspect of risk management:
KnowCo Reporting Services Datamart (‘KRSD’), a Risk Intelligence data repository from
which MI Reporting for liquidity gaps, capital buffers, risk appetite, early-warning
signals monitoring and other BSRM reports are produced. KRSD provides a combination
of high-level and detailed risk MI reports in the form of dashboards and drill-downs,
which can be customised to suit the client’s management requirements.
Business Modelling and Stress Testing with KST
KST allows a user to create and define bespoke forecasting and stress parameters that will
compute liquidity and capital requirements, and the effects of interest rate stresses and
credit impairments on earnings, under a potentially unlimited number of scenarios. It
enables the user to apply a wide range of tests to their current and projected balance sheet
and cashflows, including the behavioural modelling of cash flows with no contractual
maturity.
Data is captured at cash-flow level, while risk drivers and stress parameters are applied at
segment level (portfolio, product, reporting item name etc.) and at account, client and
connected counterparty level (for concentration risk assessment and large-exposure stresstesting).
Loading Pre-defined Scenarios
Once created, scenarios can be saved and applied to different data sets as required. A set
of scenario templates, based on the stress parameter benchmarks set by regulators, is also
provided to support the definition of the scenarios.
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April 2014
The KnowCo Stress-testing Application (KST)
Range of Stress Parameters
The range of stress-testing facilitated by KST is depicted in the KST toolbar ribbon shown
below:
KST allows the user to stress:
Non-marketable Assets (Wholesale and Retail). Users can model:
Defaults across the portfolios – individual accounts and concentrations of connected
accounts
Concentration risk
Roll-overs – contractual and behavioural
Draw-downs on committed lines
Portfolio growth or reduction in both balances and available lines
Credit rating downgrades and upgrades
Interest rate risk (IRRBB) – see below
Marketable Assets (for example Debt Securities, Equities, Commodities, Derivatives
etc.). Users can model:
Buying and selling marketable assets
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April 2014
The KnowCo Stress-testing Application (KST)
The marking-to-market revaluation of assets
Repo and reverse repo transactions
The effect of haircuts to market values, and market closures
Concentration risk
Wholesale and Retail Liabilities. Users can model:
Contractual roll-off (contractual maturity, if any, is captured in the data-mapping
process)
Behavioural roll-overs (e.g. different behaviours for “less stable” and “stable”
depositors – Types A and B in the UK)
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The KnowCo Stress-testing Application (KST)
Concentration risk (withdrawal of large deposits or default of loan exposures,
irrespective of contractual maturity)
Funding strategy – the growth or reduction of various portfolios or products
Interest rate risk (IRRBB) – see below
Intra-Group Assets and Liabilities
Intra-Group assets and liabilities can be distinguished behaviourally from other
assets and liabilities.
Off-balance sheet items (such as guarantees and Letters of Credit). Users can model:
The utilisation of credit lines for off-balance sheet products such as L/Cs
The conversion to on-balance sheet exposures and subsequent repayment or default
Concentration risk
Cross-currency risk
The potential effects on liquidity of rapidly-changing FX rates
Interest rate risk
The effects on earnings of changes in interest base rates over the short, medium
and longer term
Optionality and Repricing: flexing absolute rates of fixed interest and/or marginal
rates of variable interest, per time bucket, in order to model the effect on interest
income and expense of replacing higher-yielding assets and/or less expensive
deposits with, respectively, lower-yielding and more expensive business:
Multi-step Period stress
Plan/Stress intervals and horizons may be user-defined or configured at installation
(common horizons – e.g. 30 days for Basel III LCR, 5 years for business planning –
are in-built)
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The KnowCo Stress-testing Application (KST)
Apply stress scenarios to one or more subsets of data at a time to analyse the
impact of a stress scenario on e.g. your USD portfolios, or your mortgage book.
Reverse Stress Testing
The Reverse Stress-testing functionality allows the user to generate scenarios stressing
multiple variables in automated iterations until given capital, liquidity or earnings-at-risk
resources are depleted. Other possible uses of the reverse stress-testing functionality can
include:
Allowing the user to determine what type of business growth can be achieved with the
capital and liquidity resources in hand and planned;
Allowing the user to test how sensitive portfolios are towards certain risk drivers.
Results
Outputs can be displayed in real-time, on-screen, or produced on a scheduled basis in
batch mode. Additionally various reports are available within KST. These include daily cash
flow graphs for different time horizons, the stress parameters report and liquidity gap
analyses by portfolio, currency, etc. Outputs can also be exported to an Excel or ‘flat’ file,
or to the risk database for further analysis and reporting via the reporting functionality. The
screenshot below shows example on-screen outputs in KST:
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April 2014
The KnowCo Stress-testing Application (KST)
Management Reports
The following screens show examples of risk profile reports produced:
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April 2014
The KnowCo Stress-testing Application (KST)
About KnowCo
KnowCo provides Governance, Risk and Compliance (‘GRC’) support to financial institutions
in UK, Europe, the Middle East and Africa.
This support is across the organisational spectrum from GRC strategy, through the policy
and process-system infrastructure, to assurance and risk intelligence.
Our value proposition is based on a combination of regulatory and technical GRC subjectmatter expertise and pragmatic, proportionate delivery and implementation skills.
Our risk management applications help banks and other institutions deal more quickly and
cost-effectively with GRC challenges.
Please contact us for an informal discussion
Paul Ashton
+44 (0)7799 113535
[email protected]
Lise Land
+44 (0)7732 832246
[email protected]
KnowCo Limited
23 Austin Friars, London EC2N 2QP
+44 (0)207 084 6387
www.knowco.co.uk
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April 2014

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