Planning ahead is a vital part of business management, involving forecast on not only potential profits but also expected losses. By placing pressure on the portfolio from the outset, the management is able to foresee where the major weaknesses are and take remedial action if necessary. Stress testing is a means to gauge these weaknesses and can initiate on two levels:

• Micro risk – single risk that is tested independent of each other such as changes in interest rates, exchange rates, equity prices, government tax policy or capital requirements; and
• Macro risk - collective risk that may impact the portfolio concurrently such as changes in the macroeconomics, political environment or disruptions in specific markets.

There are some techniques to be applied for stress testing:

• Scenario analysis via market factor shocks;
• Model parameter shocks;
• Historical event simulations;
• Instantaneous or horizon-adjusted demonstration; and
• Independent or correlated factor movements

Since banks are highly leveraged businesses by nature, the management is required to determine the proper amount of capital used to maintain solvency in case of crisis. CT RISK will help banks execute practical and effectual stress tests that adhere to the current regulations and accounting standards relating to capital and risk.