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

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