Page 136 - Risk Management in current scenario

state of the world if such risks occurs. It is for the management to plan for
mitigation action by accepting, transferring, managing or avoiding risks, and
if none of the actions are possible then keep additional capital.

However, the success of SST depends on number of factors such as
X Clear understanding differences between Stress testing, Sensitivity
testing, and Scenarios building
X Identifying right scenarios for right purpose

X Understanding of SST results by the Senior Management and the
Board

X Development of realistic and doable Management action plans
Differences between Stress, Sensitivity and Scenario

building
Stress testing and Scenario analysis are often interchangeably referred In
the context of risk management. However, stress testing is a bottom up
approach while scenario analysis is a top-down approach. Stress testing is
about a large change in the risk factor while scenario analysis is an
alternative state of the world. Stress testing quantifies the loss under the
extreme event without assigning the probability of happening of an event.

Scenario testing
A scenario is all possible future outcomes at a point of time or over a
period of time. A scenario may be generated through one or more events
or changes in circumstances through identification or simulation of
several risk factors over a period of time. A scenario testing is useful to
generate many possible outcomes for management to study and take
appropriate action.

The Management is to decide whether the scenarios are standalone or
correlated and interpret the results and create management action
accordingly.

Therefore, the Management should be aware of whether the test

134 | Risk Management in Current Scenario