All Insights Case Study Axtria Conducted Stress Testing For Basel Credit Risk Models Within A Well Defined Stress Testing Framework

    Axtria Conducted Stress Testing For Basel Credit Risk Models Within A Well Defined Stress Testing Framework

    Stress Testing

    Axtria Conducted Stress Testing For Basel Credit Risk Models Within A Well Defined Stress Testing Framework

    Axtria Conducted thorough stress testing for Basel Credit Risk Models within a well defined Stress Testing Framework, approaches & results achieved are shown in this case study.

    Axtria Conducted Stress Testing For Basel Credit Risk Models Within A Well Defined Stress Testing Framework

    Situation

    A leading US credit card issuer wanted to conduct stress tests on its portfolio to determine impact on model performance and RWAs



    Approach

    A dedicated team of 6 specialists conducted thorough stress testing of portfolio encompassing risk driver stress testing, default rate stress testing and scenario stress testing (macro-economic)

    IDENTIFY STRESS PERIOD
    • Stress Period Identification: Plotted historical default rates for the portfolio
    • Identified Peak Historical Default Rate as stress period
    • For all segments identify top model predictors

    STRESS INDEPENDENT VARIABLES
    • Stress factor computation: For all predictors index them against risk* grades as of the stress period
    • For all such grades (without changing grade bounds) create index as of the “scoring” month
    • For each grade-variable cell compute the stress factor, floor it to 1
    • Stress variable creation: Apply this factor to all independent variables as of scoring month at segment – risk grade level

    RWA AND MODEL PERFORMANCE
    • Model Performance: Score the model using stressed model variables
    • Compute Gini, K-S, and other metrics to determine model performance, Characteristic’s analysis
    • Compute RWA for stressed capital requirement and comparison with economic capital

    stress testing basel methods



    Results

    • Conducted stress tests within 3 months’ time frame for a single portfolio
    • Around 16 segment PD model, 4 segment LGD model, and 6 segment EAD model
    • Led to enhanced understanding of model strength and predictive power
    • RWA computation report for various scenarios provided for benchmarking and business use