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This slide presentation covers popular questions such as Should you stress test?, What are the Basel II guidelines for stress testing?, and What will you gain from stress testing?

The Basics of Stress Testing [pdf, 188k]

Stress testing is an emerging area of best practice in retail lending. Lenders are putting more resources into stress tests since these efforts all aim to head off possible portfolio problems before they occur.

Strategic Analytics (SA) provides stress testing services for retail lending portfolios. We employ our sophisticated portfolio modeling software to stress test for PD, LGD and EAD, in addition to a much broader set of variables, notably roll rates, attrition, delinquency and charge-off, balance per account, and recovery.

Stress testing is important from both a regulatory and a managerial standpoint. Basel II mandates certain portfolio stress tests alongside its prescriptions for capital approaches. Regulators might also want to see more rigorous stress testing over a longer period since this ability gives strong evidence of the lender's analytical capabilities.

Better planning avoids reactionary management, one of the highest possible costs in a business with high fixed costs and long resource lead times. In addition, there is immediate payoff from using your stress testing results to guide product pricing, consider new product features, and develop contingency plans.
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