Stress testing has evolved considerably since in the US Treasury Department directed 19 of the country’s largest financial companies to undertake this action in the spring of 2009. The Dodd-Frank Act requires large financial companies to stress test their balance sheets annually and report these findings to the Federal Reserve. Industry experts expect that regulators will apply some form of stress testing to the entire bank marketplace. Federal regulators, for example, are now examining stress testing as a ‘best practice’ for bank risk management. If this comes to pass, banks will want to include stress testing in their risk management protocol as is presently the case with interest rate risk analyses.

Beyond risk management, stress testing is evolving into a strategic planning tool to help management forecast and optimize capital levels. Minimum capital levels are defined by regulation. ‘Sufficient’ capital involves judgment. This is a function of, among other factors, the bank’s financial position, growth strategy, and competitive marketplace. The accurate forecasting of a bank’s capital needs is critical to regulatory compliance and financial success. But excess capital means less leverage, fewer earning assets and therefore, less profit.

The Invictus Solution

Invictus has developed a stress testing methodology (ICAM) that analyzes stress and the resulting regulatory capital levels with the same general criteria used by regulators. It effectively models how and when a bank would actually perform under and recognize the consequences of stress on their portfolio. Like any operating bank, the ICAM utilizes a standard or customized risk rating system to manage the loan portfolio, and then simulates how loans will behave under certain levels of stress.

The ICAM methodology helps banks and their respective executive teams overcome the extraordinary regulatory and financial challenges they face in today’s banking environment. The ICAM methodology does this by:

• Providing immediate clarity on the banks’ present financial position.
• Quantifying the projected deterioration or strength of regulatory capital levels by focusing on the bank’s assets and their performance under stress.
• Predicting the timing of changes to regulatory capital levels.
• Identifying potential solutions and their positive impact on the bank’s regulatory capital, earnings and other performance metrics.
• Providing critical information for addressing potential regulatory or D&O insurer inquiries.
• Analyzing the impact of potential mergers, acquisitions or divestitures on the bank’s regulatory capital.
• Structuring transactions and other corporate finance activities on behalf of the bank.
  

How we Work With our Bank Clients

When we are engaged by a bank, we work with the bank’s team to create a customized ICAM Stress Test incorporating the bank’s specific and proprietary information in combination with our own proprietary methodology and databases.

Click the button below to see the ICAM Overview for a more detailed explanation of this methodology.

Deliverables in a typical engagement include:

• The customized ICAM Stress Test incorporating three scenarios on a forward 2-year basis reflecting Best Case, Most Likely Case and Worst Case scenarios.
• Competitive stress test reports on up to 5 competitor banks based on the ICAM Public Data Model, including highlighting the issues confronting each.
• A preliminary report analyzing the bank’s post-stress position and outlining the market risk exposures and their expected impact on post-stress capital, earnings and other performance measures.
  

Then, following consultation with bank management on the above findings, Invictus will:

• Prepare a written report of the ICAM Stress Test findings, their implications, and identify potential strategies and actions for consideration.
• Present the findings to the bank’s board of directors.
• Provide a written Stress Test report for the bank’s regulators.
  

Additionally, Invictus can provide a number of other services based on the outcome of the ICAM Stress Test and the bank’s needs. Some of those services include:

• Preparation of an enterprise valuation analysis suitable for presentation to potential investors.
• Corporate finance and investment banking services including analyses of corporate restructuring, capital infusions, acquisitions and merged entity scenarios, and the structuring, negotiating and marketing of any potential transaction.
• Advisory support and/or presentation materials to communicate the highlights and results of the customized stress test analysis to regulators, existing and potential investors and other audiences as required by the Bank.

Stress testing is coming - what do I need to know?

As banks are recognizing that their regulators are looking to them to develop a sound stress policy, and that stress testing the right way can provide a sound basis for strategic and capital planning, what are the responsibilities of the bank, the directors and CEO/Senior Executives? 

Click on the button below to view more information on Stress Testing and how it relates to the banking environment, the Bank’s responsibility, the Bank Directors' responsibility, the CEO and Senior Executive's Responsibility and how the Invictus ICAM™ Methodology helps banks define solutions.