Related provisions for GENPRU 1.2.63
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A firm must make a written record of the assessments required under this section. These assessments include assessments carried out on a consolidated basis and on a solo basis. In particular it must make a written record of:(1) the major sources of risk identified in accordance with GENPRU 1.2.30R (2) (Main requirement relating to risk processes, strategies and systems);(2) how it intends to deal with those risks; and(3) details of the stress tests and scenario analyses carried
There are three broad purposes of stress testing and scenario analysis. Firstly, it can be used as a means of quantifying how much capital might be absorbed if an adverse event or events occurred. As such it represents a simple ‘what if’ approach to estimating exposure to risks. This might be a proportionate approach to risk management for an unsophisticated business. Secondly, it can be used to provide a check on the outputs and accuracy of risk models; particularly, in identifying
Both stress testing and scenario analyses are forward-looking analysis techniques, which seek to anticipate possible losses that might occur if an identified risk crystallises. In applying them, a firm should decide how far forward to look. This should depend upon:(1) how quickly it would be able to identify events or changes in circumstances that might lead to a risk crystallising resulting in a loss; and(2) after it has identified the event or circumstance, how quickly and effectively
(1) 6In identifying an appropriate range of adverse circumstances and events in accordance with GENPRU 1.2.42R (2):(a) a firm will need to consider the cycles it is most exposed to and whether these are general economic cycles or specific to particular markets, sectors or industries;(b) for the purposes of GENPRU 1.2.42R (2)(a), the amplitude and duration of the relevant cycle should include a severe downturn scenario based on forward looking hypothetical events, calibrated against
As part of its business planning and risk management obligations under SYSC, a firm must reverse stress test its business plan; that is, it must carry out stress tests and scenario analyses that test its business plan to failure. To that end, the firm must:(1) identify a range of adverse circumstances which would cause its business plan to become unviable and assess the likelihood that such events could crystallise; and(2) where those tests reveal a risk of business failure that