Banking organizations with more than $10 billion in total consolidated assets will be required to employ stress testing as an integral component of risk management. Functionality, such as applying bank specific scenarios or regulatory scenarios and preparing nine quarters projections on small business portfolios, present challenges to bankers’ ability to comply with regulatory agency requirements. Gathering and managing data to build the stress testing on fundamental building blocks of credit further complicates bank efforts and raises their costs. PayNet AbsolutePD® Stress Test Simulator provides the borrower level defaults for small business loans that were a limitation cited in the Board of Governors’ Comprehensive Capital Analysis and Review (CCAR) 2012.

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Industry Leading Innovation

PayNet AbsolutePD Stress Test Simulator generates scenario based probability of default predictions at the individual obligor level, based on the set of Federal Reserve System (FRS) macroeconomic variables, and on the result of PayNet AbsolutePD® (APD). This scenario generation framework is designed to be implemented as an add-on module to the current APD modeling infrastructure. The APD scenario analysis module is currently able to output four sets of scenarios, which include two sets of FRS scenarios, baseline and stressed, together with two sets of user defined scenarios.

In the figure below, sample FRS baseline and stressed scenarios are illustrated. One user defined baseline scenario is set equal to the FRS baseline while a second user-defined scenario is depicted as  favorable (currently set to taking the opposite change from the FRS baseline to the stressed scenario).

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Key Benefits with PayNet AbsolutePD Stress Test Simulator

Bankers will enjoy lower operating costs and increased management time as they validate their own results and spend less time complying with regulatory requirements. One added benefit is that PayNet AbsolutePD Stress Test Simulator bolsters banks’ reputation among external parties for having sound credit risk management. Banks can quickly and accurately derive expected loss (EL) which is the fundamental building block of credit risk management.

PayNet AbsolutePD Stress Test Simulator Solutions

There are several key features of the PayNet AbsolutePD Stress Test Simulator available to banks in estimating their capital needs.

The Challenge

Our Solution
  • Ensuring robust, forward-looking capital planning that accounts for unique risks
  • Enables strategies for managing your capital over a nine-quarter planning horizon
  • Demonstrating sufficient capital throughout economic and financial market stress
  • Incorporates 14 measures of economic activity, asset prices, financial conditions and interest rates
  • Overcoming data limitations to project PD, LGD and Exposure at Default
  • Extends nine quarters beginning 4Q 2012 through 4Q 2014
  • Creating internal checks on regulatory scenarios
  • Applies Supervisory Stress Scenarios and user defined scenarios