Page 138 - Risk Management in current scenario

Development of realistic and doable Management

action
The full benefits of SST can only be realized if the management actions
developed to manage the risks are realistic and doable. It has been
observed at times that the management action is itself a risk because either
the actions are not attainable or they are impractical given the portfolio.
For example, if the stress on interest rate results into large change in the
assets and liability mismatch and the mitigating action is to re-price
products, however, if the entire portfolio is of non-par products, the
mitigation action will require repricing of entire portfolio and thereby the
Company will not have any new product to sell. So this action is not
practical, the Company needs products diversification in this case first.
Understanding of SST results by Senior Management

and Board
The final ounce of SST results rests on the understanding of results of
SST by the Senior Management, their recommendations to the Board and
how seriously the Board acts. Millions of pages have been written as a
part of a discussion of 2008 economic crisis pointing fingers towards
Board where Board has either failed to appreciate risks or take right
corrective action.

Banking
The situation is quite similar in the banking industry where the SST is quite
a popular tool in assessing the capital adequacy in the Banks. In the US
the Dodd-Frank Wall Street Reforms, and Consumer Protection Act requires
the Board of Governors of the Federal Reserve to conduct annual
supervisory stress test of bank under three supervisory scenarios- baseline,
adverse and severely adverse. The adverse and severely adverse scenarios
are hypothetical in nature to assess the resilience of banks under adverse
environment. The stresses span over a period of time; for example for 2016
stresses, the stresses level span over the first quarter of 2016 to the first
quarter of 2019. Following scenarios are considered for baseline 2016
scenarios
X Six scenarios of economic activity- Real and Nominal GDP,
Unemployment, real and nominal disposable income, Inflation

136 | Risk Management in Current Scenario