The analysis of portfolio behaviour in extreme cases, stress testing, in a financial institution is becoming an indispensable part of risk management. This is not only because of regulatory requirements (Basel II and III), but also more importantly as an aid to strategic analysis of financial institutions to identify the best policies in a market capable of undergoing critical changes.
The stress test is a diagnostic tool for understanding the risk profile of a company. At a time of crisis like now, it is very important to know what may happen to the portfolios of banks when defining strategies, investments, etc. Comparing the results of stress tests with existing business plans is an invaluable aid in making decisions on possible adjustments.
AIS has capitalised on its experience in the financial sector with the launch of a new method for calculating economic capital and stress testing. This method, RDF (Risk Dynamics into the Future), has been implemented as a powerful software solution to become the new standard in the area of risk management.
The innovation of the AIS system is that it is a scaleable platform with many applications which can cover all types of risks (credit, liquidity, market, etc). It is not only capable of calculating the distribution of losses conditional on a particular scene, but also lets you project the balance sheet and income statement conditional on certain events. This makes the method developed by the Spanish company a powerful simulation tool which provides valuable information for forming business strategies.
The benefits of using the RDF method
The method was conceived as a GNU product, whose knowledge is available to professionals and academics interested in its implementation and extension.
RDF incorporates innovative features, such as a new concept of the economic scene, modelling of the probability of default (PD) and loss given default (LGD) using macroeconomic variables as covariates, VARMA multi-equation models of macroeconomic and sectoral variables, homogeneous risk measures associated with economic capital measures conditional on the scene, and an analytical method for calculating the multiple integral forming the losses probability distribution function (PDF), which is an alternative or auxiliary form of the Monte Carlo method.
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