Effective Risk Assessment and Strategic Planning

Stress Tests & Scenario Analysis

Comprehensive consulting for the development and implementation of stress tests and scenario analysis to assess your resilience and strategic preparation for multiple future developments.

✓Regulatory Compliance (EBA, BaFin)
✓Improved Risk Resilience
✓Optimized Capital Allocation

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Our clients trust our expertise in digital transformation, compliance, and risk management

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Comprehensive Stress Tests and Scenario Analysis

Our Strengths

In-depth expertise in regulatory requirements (EBA, BaFin)
Experience with advanced modeling techniques
Proven implementation strategies

⚠

Expert Tip

The combination of quantitative stress test models and qualitative scenario techniques is crucial to ensure strategic agility in volatile markets and meet regulatory requirements.

ADVISORI in Numbers

11+

Years of Experience

120+

Employees

520+

Projects

We accompany you with a structured approach in the development and implementation of your stress tests and scenario analysis.

Our Approach:

Analysis of existing risk situation and processes

Development of customized stress test and scenario analysis frameworks

Implementation, training, and continuous improvement

"Effective stress tests and scenario analysis are crucial for risk resilience and strategic agility in an increasingly volatile and complex market environment."

Andreas Krekel

Head of Risk Management, Regulatory Reporting

Expertise & Experience:

10+ years of experience, SQL, R-Studio, BAIS-MSG, ABACUS, SAPBA, HPQC, JIRA, MS Office, SAS, Business Process Manager, IBM Operational Decision Management

LinkedIn Profile

Our Services

We offer you tailored solutions for your digital transformation

Stress Test Design and Implementation

Development and implementation of customized stress test frameworks

Regulatory Stress Tests (EBA, BaFin)
Reverse Stress Tests
Multi-Factor Stress Tests

Scenario Analysis for Strategic Planning

Development and implementation of scenario analysis for strategic decisions

PESTEL Analysis and Trend Analysis
Strategic Implications Analysis
Integration into Decision Processes

Climate Risk Integration and ESG Stress Tests

Integration of climate risks and ESG factors into stress tests and scenario analysis

Physical and Transition Climate Risks
CO2 Price Path Scenarios
ESG Risk Assessment

Our Competencies in Financial Risk

Choose the area that fits your requirements

Credit Risk Management & Rating Procedures

Credit risk management and rating methods for financial institutions. Risk models, scoring systems and regulatory requirements.

Liquidity Management

Liquidity management and liquidity risk management for banks. LCR, NSFR, stress testing and regulatory liquidity requirements.

Market Risk Assessment & Limit Systems

Market risk assessment and limit systems for financial institutions. VaR, expected shortfall, sensitivities and regulatory capital requirements.

Model Development

Risk model development for financial institutions. Credit, market and operational risk models to regulatory standards.

Model Governance

Model governance framework for financial institutions. Model risk management, validation, inventory and regulatory requirements.

Model Validation

Model validation for risk models per MaRisk, EBA and BCBS. Independent review of model quality, assumptions and regulatory conformity.

Portfolio Risk Analysis

Portfolio risk analysis and management for financial institutions. Diversification, concentration, stress testing and capital allocation.

Frequently Asked Questions about Stress Tests & Scenario Analysis

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

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)

What types of stress tests exist?

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

How do you develop an effective stress test framework?

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 solidness

• 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

What regulatory requirements exist for stress tests?

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

How do you conduct scenario analysis for strategic decisions?

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

• Solidness 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

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

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: Effective 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%

What are reverse stress tests and how are they conducted?

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

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

Stress tests and scenario analysis fulfill several important functions in strategic planning:

🎯 Strategic Decision Support

• Solidness 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 effective 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 CO 2 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

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

The future of stress tests and scenario analysis is shaped by several effective 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 CO 2 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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Digitalization in Steel Trading

Klöckner & Co

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Festo

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Generative AI in Manufacturing

Bosch

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