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CrTAS: Risk Reporting, Stress Testing, and Capital

CrTAS · Work through your exam, one topic at a time.

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Risk Reporting, Stress Testing, and Capital

Risk Reporting, Stress Testing, and Capital

This domain tests whether you can design a stress test, walk capital through it, and report the result credibly to a board. Expect a CET1 ratio walk and questions on scenario choice, the capital stack or BCBS 239 data quality.

Stress testing

Three families: sensitivity (single-factor shock), scenario (coherent multi-factor, historical or hypothetical), and reverse stress (find the scenario that breaks the bank). A credible programme links macro variables to pre-provision net revenue, credit losses, market losses, funding costs and RWA over a two to three year horizon, with static and dynamic balance-sheet variants. Regulatory uses include ICAAP, CCAR/DFAST, and the EBA and BoE exercises.

Capital stack

Pillar 1 minimum: CET1 4.5%, Tier 1 6.0%, total capital 8.0% of RWA. On top: capital conservation buffer 2.5% CET1, countercyclical buffer 0-2.5%, G-SIB surcharge, and pillar 2 requirements. Breaching the combined buffer triggers MDA restrictions on distributions that scale with proximity to the minimum. Leverage ratio minimum 3%. The Basel III output floor caps internal-model RWA at 72.5% of the standardised result.

Reporting

BCBS 239 principles cover governance, data architecture and IT infrastructure, accuracy and integrity, completeness, timeliness, and adaptability. Reports must reconcile to the general ledger and to source systems.

Worked example

Opening CET1 capital $12.0bn on RWA $100bn = 12.0%. Over the stress horizon: PPNR +$2.5bn, credit losses -$4.0bn, market and other losses -$1.0bn, tax credit +$0.5bn, so net -$2.0bn. CET1 falls to $10.0bn. RWA inflate to $105bn through credit migration and model add-ons. Stressed ratio = 10.0 / 105 = 9.52%. Against a requirement of 4.5% plus 2.5% conservation buffer plus 1.0% countercyclical buffer = 8.0%, the bank passes with 1.52 percentage points of headroom.

Traps

  • Treating RWA growth as a capital deduction instead of a denominator effect.
  • Forgetting tax effects, or applying tax to pre-provision revenue.
  • Reporting the stressed ratio against the opening RWA base.
  • Describing an MDA restriction as insolvency; it restricts distributions, not operations.
  • Presenting a stress result with no management actions or link back to risk appetite.