Question 1

What are stress tests and how do they differ from scenario analysis?

Accepted Answer

Stress tests and scenario analysis are complementary risk management instruments with different focuses:🔍 Stress Tests• Definition: Analysis of the impact of extreme but plausible events on a company's financial or operational stability• Focus: Quantitative assessment of resilience to specific shocks• Time Horizon: Typically short-term (immediate impacts)• Application Area: Primarily risk management and regulatory compliance• Example: Impact of a 35% stock market crash on capital adequacy📊 Scenario Analysis• Definition: Examination of coherent future scenarios incorporating multiple risk factors and trends• Focus: Qualitative and quantitative assessment of various possible future developments• Time Horizon: Medium to long-term (strategic perspective)• Application Area: Strategic planning and decision-making• Example: Development of electromobility strategy under various technological and regulatory scenarios🔄 Complementary Aspects• Methodological Integration: Stress tests can be part of more comprehensive scenario analysis• Data Foundation: Both use historical data, expert assessments, and model projections• Decision Support: Both provide insights for management and supervisory bodies• Regulatory Context: Increasing convergence through supervisory requirements (e.g., EBA guidelines)

Question 2

What types of stress tests exist?

Accepted Answer

Various types of stress tests exist, deployed depending on application area and objectives:

🔍 By Risk Factor Coverage

• Sensitivity Analysis: Isolated shocks to individual risk factors (e.g., interest rate increase of

200 basis points)

• Multi-Factor Stress Tests: Simultaneous shocks to multiple risk factors considering correlations

• Systemic Stress Tests: Consideration of contagion effects and feedback loops in the financial system

📊 By Scenario Design

• Historical Scenarios: Replication of past crisis periods (e.g.,

2008 financial crisis,

2020 COVID‑19 shock)

• Hypothetical Scenarios: Simulation of plausible but not yet occurred events

• Hybrid Scenarios: Combination of historical experiences with hypothetical elements

⚙ ️ By Methodological Approach

• Reverse Stress Tests: Identification of scenarios that would lead to predefined critical losses or company collapse

• Bottom-up Stress Tests: Detailed modeling at individual position level

• Top-down Stress Tests: Aggregated modeling at portfolio level

🌱 By Risk Types

• Market Risk Stress Tests: Focus on market price changes (equities, interest rates, currencies, commodities)

• Credit Risk Stress Tests: Analysis of default probabilities and loss rates

• Liquidity Stress Tests: Assessment of payment capacity under stress conditions

• Operational Stress Tests: Simulation of system failures, cyber attacks, or process errors

• Climate Stress Tests: Analysis of physical and transitional climate risks

🏢 By Regulatory Context

• Supervisory Stress Tests: Scenarios and methodology prescribed by regulatory authorities (e.g., EBA stress tests for banks)

• Internal Stress Tests: Tests developed and conducted by the company itself

• ICAAP/ILAAP Stress Tests: Within the framework of internal capital and liquidity adequacy processes

Question 3

How do you develop an effective stress test framework?

Accepted Answer

Developing an effective stress test framework comprises several key components:🎯 Strategic Foundations• Define Objectives: Clear definition of goals (regulatory compliance, capital planning, risk management)• Establish Governance Structure: Roles, responsibilities, and decision processes• Integrate Risk Appetite: Link with overarching risk framework• Observe Proportionality Principle: Appropriateness to company size and complexity📊 Scenario Design• Identify Risk Factors: Systematic capture of relevant risk drivers• Calibrate Scenarios: Determine shock intensity (historical data, expert assessments)• Consider Correlations: Realistic representation of dependencies between risk factors• Define Time Horizons: Short-term shocks vs. longer-term developments• Ensure Scenario Consistency: Logical coherence of assumptions⚙️ Modeling Approach• Determine Granularity: Level of detail in modeling (individual position vs. portfolio)• Select Methods: Statistical models, simulation techniques, expert estimates• Define Data Foundation: Requirements for quality, timeliness, and completeness• Establish Validation Process: Verification of model accuracy and robustness• Document Limitations: Transparency about model assumptions and boundaries📈 Implementation and Operationalization• Build IT Infrastructure: Systems for data management and calculation• Process Integration: Integration into existing risk management and planning processes• Determine Automation Level: Balance between efficiency and control• Create Documentation: Comprehensive description of methods, assumptions, and processes• Develop Training Program: Competence building among relevant employees🔄 Reporting and Action Derivation• Define Report Formats: Target group-appropriate presentation of results• Set Thresholds: Triggers for actions when exceeded• Establish Escalation Processes: Clear paths for critical results• Develop Action Catalog: Predefined action options for various scenarios• Establish Feedback Loop: Continuous improvement of the framework

Question 4

What regulatory requirements exist for stress tests?

Accepted Answer

Regulatory requirements for stress tests vary by industry and region but typically include:🏦 Banks and Financial Institutions• EBA Guidelines 2018-04: Comprehensive requirements for stress test management - Differentiation between sensitivity analysis and scenario stress tests - Requirements for anchor scenarios as reference points - Integration into ICAAP/ILAAP processes• Basel Framework: Specific requirements for various risk types - Market Risk: Expected Shortfall under stress periods - Credit Risk: Downturn-LGD and Stress-PD - Liquidity Risk: LCR and NSFR under stress conditions• MaRisk (Germany): Detailed specifications for design - AT 4.3.2: Integration into risk-bearing capacity concept - BTR 1-4: Specific requirements per risk type🏢 Insurance Companies• Solvency II: Stress tests as part of ORSA process - Own Risk and Solvency Assessment - Reverse stress tests to identify existential threats• BaFin Requirements: Standardized stress parameters - R 10: 10% decline in bond prices - A 35: 35% stock market crash - RA 25: Combined shock of -5% bonds and -20% equities🏭 Non-Financial Companies• Corporate Governance Code: Risk management requirements - Appropriate early risk detection systems - Regular reporting to supervisory bodies• IDW PS 340: Audit standard for early risk detection system - Identification of going-concern risks - Documentation of stress test results🌱 Climate-Related Requirements (cross-industry)• TCFD Recommendations (Task Force on Climate-related Financial Disclosures) - Scenario analysis for physical and transitional climate risks - Disclosure of methodology and results• ECB Guide on Climate Risks - Integration of climate scenarios into existing stress test frameworks - Consideration of various temperature paths (1.5°C, 2°C, 3°C+)📋 Overarching Requirements• Governance and Responsibilities - Involvement of board and supervisory board - Clear assignment of roles and competencies• Documentation and Traceability - Comprehensive description of methods and assumptions - Audit trail for model changes• Validation and Quality Assurance - Regular review of model quality - Independent control by risk control function

Question 5

How do you conduct scenario analysis for strategic decisions?

Accepted Answer

Scenario analysis for strategic decisions follows a structured process:🎯 Preparation and Focusing• Define Strategic Question: Precise formulation of the decision to be examined• Set Time Horizon: Typically 3-10 years for strategic analysis• Involve Stakeholders: Early integration of relevant decision-makers and experts• Resource Planning: Determination of budget, timeframe, and required expertise🔍 Environmental Analysis and Influence Factor Identification• PESTEL Analysis: Systematic capture of political, economic, social, technological, ecological, and legal factors• Trend Analysis: Identification of long-term developments with high probability of occurrence• Uncertainty Analysis: Determination of factors with high uncertainty and high influence• Expert Interviews: Obtaining various perspectives on key factors• Cross-Impact Analysis: Assessment of interactions between influence factors📊 Scenario Development• Define Scenario Logic: Determination of main axes of uncertainty• Span Scenario Framework: Typically 3-5 distinct, plausible future scenarios• Develop Narratives: Formulation of coherent stories for each scenario• Consistency Check: Ensuring internal logic of each scenario• Quantification: Translation of qualitative descriptions into measurable parameters⚙️ Strategic Implications Analysis• Robustness Analysis: Assessment of existing strategies under all scenarios• Opportunity-Risk Assessment: Identification of specific opportunities and threats per scenario• Option Development: Derivation of strategic action alternatives• Flexibility Analysis: Assessment of adaptability of various options• No-Regret Moves: Identification of measures beneficial in all scenarios🔄 Integration into Decision Processes• Strategy Adjustment: Modification of existing or development of new strategies• Early Warning Indicators: Definition of signals for development toward specific scenarios• Continuous Monitoring: Regular review of scenario relevance• Communication Plan: Conveyance of scenarios and derived strategies• Implementation Planning: Concrete steps for implementing chosen strategy

Question 6

How do you integrate climate risks into stress tests and scenario analysis?

Accepted Answer

Integrating climate risks into stress tests and scenario analysis requires a specialized approach:

🌡 ️ Climate Scenario Frameworks

• NGFS Scenarios (Network for Greening the Financial System) - Orderly Transition: Early and gradual climate policy - Disorderly Transition: Delayed and abrupt measures - Hot House World: Insufficient measures with severe physical consequences

• IEA Scenarios (International Energy Agency) - Net Zero Emissions by

2050 (NZE)

• Announced Pledges Scenario (APS)

• Stated Policies Scenario (STEPS)

• IPCC Pathways (Intergovernmental Panel on Climate Change) - SSP1‑1.9: Sustainable development (1.5°C target) - SSP2‑4.5: Middle way (2.7°C warming) - SSP5‑8.5: Fossil-intensive scenario (4.4°C warming)

🔍 Risk Typology

• Physical Risks - Acute Risks: Extreme weather events (floods, storms, heat waves) - Chronic Risks: Long-term climate changes (sea level rise, desertification)

• Transition Risks - Political Risks: CO 2 pricing, regulations, bans - Technological Risks: Disruptive innovations, stranded assets - Market Risks: Changed consumer behavior, commodity price volatility - Reputational Risks: Changed stakeholder expectations

📊 Modeling Approaches

• Top-down Approach - Macroeconomic Models: Representation of economy-wide effects - Sectoral Vulnerability Matrices: Industry-specific impacts - CO 2 Price Paths: Dynamic simulation of pricing scenarios (€50–€200/t)

• Bottom-up Approach - Geolocalized Exposures: Location-specific physical risks - Technology Pathways: Detailed analysis of technology disruptions - Emission Intensity: Granular analysis at company level

⚙ ️ Practical Implementation

• Time Horizons - Short-term (1‑5 years): Focus on transition risks and acute physical risks - Medium-term (5‑10 years): Combination of transition and physical risks - Long-term (10‑30 years): Comprehensive integration of all climate risks

• Data Sources - Climate Models: CMIP6, regionalized climate projections - Emission Data: Scope 1‑3 emissions from companies - Geographic Information Systems: Location data and natural hazard maps

• Governance - Climate Risk Committee: Specialized body for climate stress tests - Expert Involvement: Climate scientists, economists, industry experts - Reporting: Integration into regular risk reporting

🔄 Case Example: Climate Stress Test for Financial Institutions

• Model Parameters - Horizon: 2030/2050 - CO 2 Price: €75–€150/t - Physical Risks: Increased frequency of natural disasters

• Insights - Steel Industry: Default probability +18% - Energy Sector: Equity requirement +34%

Question 7

What are reverse stress tests and how are they conducted?

Accepted Answer

Reverse stress tests are an advanced risk management instrument with specific methodology:🎯 Concept and Objectives• Definition: Identification of scenarios that would lead to company collapse or predefined critical losses• Regulatory Context: Mandatory component of ORSA process for insurers and ICAAP for banks• Perspective Shift: Reversal of classic stress test logic (from result to scenario)• Added Value: Uncovering blind spots in risk management and identifying existential threats📊 Methodological Approaches• Reverse Engineering - Definition of critical state (e.g., falling below regulatory capital ratios) - Backward calculation to determine necessary shock intensities - Iterative adjustment of risk factors until reaching critical state• Bayesian Networks - Modeling of dependency structures between risk factors - Conditional probabilities for various risk combinations - Identification of plausible paths to critical state• Optimization Algorithms - Objective Function: Minimization of shock intensity while reaching critical state - Constraints: Plausibility limits for risk factors - Solution Methods: Genetic algorithms, simulated annealing⚙️ Practical Implementation• Preparation Phase - Definition of critical thresholds (e.g., solvency ratio <100%, liquidity ratio <85%) - Identification of relevant risk factors and their mechanisms - Determination of plausibility limits for risk factor characteristics• Modeling Phase - Development of mathematical relationships between risk factors and critical metrics - Calibration of sensitivities and correlations - Implementation of chosen methodological approach• Analysis Phase - Calculation of various scenarios leading to critical state - Assessment of plausibility and probability of occurrence - Identification of risk clusters and vulnerabilities• Action Derivation - Development of preventive measures for identified weaknesses - Definition of early warning indicators for critical developments - Integration into emergency management and capital planning🔄 Application Examples• Banks - Identification of market constellations leading to falling below minimum capital ratio - Analysis of liquidity shortages that could lead to payment default• Insurance Companies - Determination of catastrophe scenarios threatening solvency ratio - Analysis of capital market developments impairing asset-liability coverage• Industrial Companies - Identification of supply chain disruptions leading to production shutdown - Analysis of market developments pushing profitability below critical thresholds

Question 8

What role do stress tests and scenario analysis play in strategic planning?

Accepted Answer

Stress tests and scenario analysis fulfill several important functions in strategic planning:🎯 Strategic Decision Support• Robustness Testing: Assessment of resilience of strategic options under various future conditions• Option Evaluation: Comparative analysis of alternative strategies under multiple scenarios• Risk-Return Optimization: Identification of strategies with optimal balance between opportunities and risks• Prioritization: Focus on critical uncertainties with high strategic impact🔍 Expansion of Strategic Perspective• Overcoming Cognitive Biases: Reduction of groupthink and confirmation bias• Identification of Blind Spots: Uncovering overlooked risks and opportunities• Perspective Expansion: Integration of different stakeholder viewpoints• Early Warning System: Recognition of weak signals for disruptive changes📊 Integration into Strategic Planning Process• Strategy Development: Input for formulation of vision, mission, and strategic goals• Strategic Analysis: Complement to classic methods like SWOT or Porter's Five Forces• Strategy Implementation: Development of adaptive implementation paths• Strategic Controlling: Continuous review of scenario relevance⚙️ Practical Application Examples• Product Strategy - Electromobility strategy of automotive manufacturer under various technology and regulatory scenarios - Development of flexible production designs to reduce CAPEX misallocation by 15%• Market Entry Strategy - Assessment of various market entry options considering geopolitical uncertainties - Development of trigger points for go/no-go decisions• Investment Strategy - Portfolio optimization under various macroeconomic scenarios - Identification of no-regret investments with positive performance in all scenarios• Sustainability Strategy - Development of decarbonization pathways under various CO2 price scenarios - Assessment of physical climate risks for global production sites🔄 Success Factors for Strategic Integration• Executive Sponsorship: Support from top management• Process Integration: Anchoring in regular strategy processes• Communication: Understandable presentation of complex scenarios• Continuity: Regular updating and further development• Action Orientation: Focus on concrete strategic implications

Question 9

What trends are shaping the future of stress tests and scenario analysis?

Accepted Answer

The future of stress tests and scenario analysis is shaped by several innovative trends:🤖 Technological Innovation• AI and Machine Learning - Automated scenario generation through generative AI - Detection of complex risk relationships through deep learning - Natural Language Processing for analysis of qualitative scenario descriptions• Big Data and Advanced Analytics - Integration of alternative data sources (satellite data, social media, IoT) - Real-time stress tests with continuous data updating - Granular modeling at individual position level• Quantum Computing - Complex Monte Carlo simulations with exponentially higher speed - Optimization of reverse stress tests through quantum annealing - Modeling of high-dimensional correlation structures🌱 Content Expansion• Climate Risk Integration - Physical Climate Risks: Detailed geolocalized modeling - Transition Risks: Sector-specific CO2 price paths - Biodiversity Risks: Assessment of natural capital and ecosystem services• Cyber Resilience - Simulation of complex cyber attacks and system failures - Assessment of contagion effects in networked systems - Integration of cyber-physical systems in stress tests• Geopolitical Complexity - Fragmentation of global markets and supply chains - Technological decoupling and digital sovereignty - Resource conflicts and trade barriers📊 Methodological Development• Adaptive Scenario Analysis - Dynamic adjustment of scenarios to new information - Bayesian updating of probabilities - Agile scenario processes with shorter cycles• Multi-Period Stress Tests - Modeling of feedback effects and management reactions - Path-dependent analysis instead of static shocks - Integration of system dynamics models• Integrated Risk Modeling - Overcoming silo structures between risk types - Consistent aggregation of various risks - Consideration of risk-risk interactions⚙️ Organizational Transformation• Democratization of Stress Tests - Self-service tools for business units - Visualization platforms for interactive scenario analysis - Collaborative scenario processes with broad stakeholder participation• Integration into Decision Processes - Embedding in operational decisions (not just strategic planning) - Linking with performance management and incentive systems - Continuous risk monitoring instead of periodic stress tests• Competence Development - Data science and AI expertise in risk management - Interdisciplinary teams of risk managers, data analysts, and subject matter experts - Promotion of scenario thinking in corporate culture

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Häufig gestellte Fragen zur Stress Tests & Scenario Analysis

What are stress tests and how do they differ from scenario analysis?

🔍 Stress Tests

📊 Scenario Analysis

🔄 Complementary Aspects

What types of stress tests exist?

🔍 By Risk Factor Coverage

📊 By Scenario Design

⚙ ️ By Methodological Approach

🌱 By Risk Types

🏢 By Regulatory Context

How do you develop an effective stress test framework?

🎯 Strategic Foundations

📊 Scenario Design

⚙ ️ Modeling Approach

📈 Implementation and Operationalization

🔄 Reporting and Action Derivation

What regulatory requirements exist for stress tests?

🏦 Banks and Financial Institutions

🏢 Insurance Companies

🏭 Non-Financial Companies

🌱 Climate-Related Requirements (cross-industry)

📋 Overarching Requirements

How do you conduct scenario analysis for strategic decisions?

🎯 Preparation and Focusing

🔍 Environmental Analysis and Influence Factor Identification

📊 Scenario Development

⚙ ️ Strategic Implications Analysis

🔄 Integration into Decision Processes

How do you integrate climate risks into stress tests and scenario analysis?

🌡 ️ Climate Scenario Frameworks

🔍 Risk Typology

📊 Modeling Approaches

⚙ ️ Practical Implementation

🔄 Case Example: Climate Stress Test for Financial Institutions

What are reverse stress tests and how are they conducted?

🎯 Concept and Objectives

📊 Methodological Approaches

⚙ ️ Practical Implementation

🔄 Application Examples

What role do stress tests and scenario analysis play in strategic planning?

🎯 Strategic Decision Support

🔍 Expansion of Strategic Perspective

📊 Integration into Strategic Planning Process

⚙ ️ Practical Application Examples

🔄 Success Factors for Strategic Integration

What trends are shaping the future of stress tests and scenario analysis?

🤖 Technological Innovation

🌱 Content Expansion

📊 Methodological Development

⚙ ️ Organizational Transformation

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