Rating Models and Validation - Oesterreichische Nationalbank

Rating Models and Validation
In order to ensure plausibility, as many internal and external experts as possible
from various professional areas should participate in the development of
stress tests.
Completeness of Risk Factors Included in the Model
Past experience has shown that when crisis situations arise, multiple risk factors
tend to show clearly unfavorable changes at the same time. Comprehensive and
realistic crisis scenarios will thus include simultaneous changes in all essential
risk factors wherever possible. Stress tests which consider the effects of a change
in only one risk factor (one-factor stress tests) should only be performed as a
complement for the analysis of individual aspects. (For an example of how risk
factors can be categorized, please see chart 78)
Extraordinary Changes in Risk Factors
Stress tests should only measure the effects of large-scale and/or extraordinary
changes in risk factors. The bankÕs everyday risk management tools can (and
should) capture the effects of ÒnormalÓ changes.
Acceptance
In order to encourage management to acknowledge as a sensible tool for
improving the bankÕs risk situation as well, stress tests primarily have to be plausible
and comprehensible. Therefore, management should be informed as early
as possible about stress tests and — if possible — be actively involved in developing
these tests in order to ensure the necessary acceptance.
Reporting
Once the stress tests have been carried out, their most relevant results should be
reported to the management. This will provide them with an overview of the
special risks involved in credit transactions. This information should be submitted
as part of regular reporting procedures.
Definition of Countermeasures
Merely analyzing a bankÕs risk profile in crisis situations is not sufficient. In addition
to stress-testing, it is also important to develop potential countermeasures
(e.g. the reversal or restructuring of positions) for crisis scenarios. For this purpose,
it is necessary to design sufficiently differentiated stress tests in order to
enable targeted causal analyses for potential losses in crisis situations.
Regular Updating
As the portfolioÕs composition as well as political and economic conditions can
change at any time, stress tests have to be adapted to the current situation on an
ongoing basis in order to identify and evaluate changes in the bankÕs risk profile
in a timely manner.
Documentation and Approval
The objectives, procedures, responsibilities, and all other aspects associated
with stress tests have to be documented and submitted for management approval.
132 Guidelines on Credit Risk Management