Portfolio Stress-Testing

Meet regulatory requirements, evaluate the impact of shocks and develop strategic plans.

At Moody's Analytics, our team of more than 80 economists employ a holistic and fundamental approach to stress-testing. We focus on the underlying drivers of portfolio performance and link these drivers to alternative scenarios based on a range of possible outcomes given the current business cycle. 

Stress-Testing Answers the Right Questions

Beyond regulatory requirements, many firms are looking to analyze how changes in the economy can affect their portfolio, whether they can remain adequately capitalized during all phases of an economic cycle and in stress scenarios, how much they may lose in a stress scenario, including the degree of impact of imprecise risk factors (risk drivers – interest rates, exchange rates, default risk, migrating and correlation). Portfolio stress-testing helps answer "What if?" questions, such as:

  • How should I adjust lending standards if the economy goes into a double-dip recession?
  • Could my portfolio withstand a sovereign default event in Europe?
  • What impact would a prolonged deflation cycle have on current and future loan performance?

Based on stress testing and scenario analyses, management can take strategic actions to mitigate risk and enhance economic return, such as adjusting economic capital levels, adjusting portfolio mix and raising/lowering lending standards.

Solutions

By linking performance drivers to global and local economic activity, our stress-testing and scenario analysis approach generates more realistic results to assess portfolio performance due to sovereign defaults, energy crises, and even of more discrete factors such as the nature and pace of an economic recovery. We provide:

  • Off-the-shelf and custom/bespoke scenarios
  • Macro and regional economic forecasts.
  • Stress-testing and loss forecasting capabilities for:
    • Capital Markets
    • Consumer/Retail Portfolios
    • Commercial & Industrial Portfolios
    • Commercial Real Estate Portfolios
    • Structured Finance Portfolios
  • Calibration services to incorporate macroeconomic variables in existing models

From our off-the-shelf macro/regional forecasts with alternative scenarios to customized models built on your unique portfolio and internal drivers, we can work with you to develop the solution that fits your specific needs. 

Custom Solutions

Custom solutions are tailored to meet our clients' portfolio strategies and key risks. Our Economic and Credit Advisory team develops and helps clients implement custom models, forecasting and stress-testing frameworks. We incorporate and link off-the-shelf and custom/bespoke scenarios across clients' portfolios for more realistic stress tests. Stressed scenarios are developed in line with our clients' unique regional and industry exposures. Our theoretical approach and equation outcomes are transparent and fully documented. When necessary further calibration on the models is performed to meet the clients' needs. Custom solutions include:

  • Credit Portfolio Risk Optimization
    Beyond regulatory driven exercises, many of our clients leverage our  expertise for portfolio risk optimization projects and strategic planning. We help investment strategy and risk teams to stress portfolios under different custom scenarios in order to provide investment criteria recommendations in line with the client risk appetite and investment objectives. These exercises are particularly popular among our asset management and insurance clients who may be required to divest under their credit investment policy should certain shocks affect the ratings of their assets.
  • Financial Metrics/Market Risk
    We have developed an integrated framework, where the background macroeconomic scenarios are fully calibrated to reflect our alternative assumptions on the relevant risks to the Moody's Analytics baseline forecast. Key macroeconomic series are then correlated to the relevant financial and credit metrics to produce the output results (e.g., yield and swap rate curves, risk-free rates, CDS spreads, rating migration, equity indexes, etc.).
  • Rating Transitions
    We can stress-test rating migrations for any portfolio of corporate (financials and non-financials) and sovereign bonds. The migration information can be provided by internal rating models and/or using Moody's transition data. We use dynamic panel data models to capture the behavior of transition matrices over time. This exercise allows us to quantify the sensitivity of migrations to changes in macro and financial series.
  • Economic Scenario Generator Engine for Solvency II
    Economic Scenario Generator is the cornerstone of a market-consistent valuation of the balance sheet. In particular, Economic Scenario Generator represents what we consider to be the appropriate tool to properly monitor and manage both market and credit risk from an integrated perspective. Our clients can benefit from our Economic Scenario Generator service in two ways; by being delivered custom outputs from our in-house model or by implementing our Economic Scenario Generator engine within their existing platforms and therefore being in full control of the process.