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Stress testing / Liquidity and funding risk [20]

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Bullet points include: CEBS (2006) document: “42. It is key that scenario composition, as well as the translation from macro-economic variables to internal risk parameters, is done consistently. Two main challenges emerge: the formulation of a scenario that incorporates all facets of an economic environment in a sound manner; and the transformation of these into internally consistent loss parameters (e.g. PD, LGD, write-offs, fair value haircuts etc.). 43. The links between the underlying economic factors and internal losses or stressed risk parameters are likely to be based primarily on institutional experience and analysis, which may be supplemented by external research and at times supervisory guidance. Benchmarks, such as those based on external research, may be quantitative or qualitative”

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