by: Ioannis Akkizidis, PhD, Product Manager, Wolters Kluwer
In our latest paper, we offer a novel approach for optimizing banks’ accounts and portfolios by using both static and dynamic simulation analysis to perform stress tests using several strategies and scenarios driven by exogenous shocks, such as Covid-19.
The pandemic has persuaded banks and credit institutions, on their own initiative, to validate and adjust their models to reflect changes to underlying risk factors and enhance strategies related to their credit and investment portfolios. This is crucial for ensuring portfolio stability over multiple timeframes. Securing portfolio stability under stress scenarios helps evaluate the conditions under which a bank can continue providing credit and investing in the best mix of assets. The strategies it adopts must be robust so that it can optimize profitability under different forward-looking stress scenarios and react quickly when a certain scenario applies.
Looking at the blue-print for building a stress-test and the application of dynamic analysis, we examine how the liquidity, value and income of existing and new financial contracts under stress scenarios can be analyzed dynamically, taking into account the interdependencies of multiple risk factors, such as market, credit and counter-party, and behavioral risks, to optimize future portfolios.
The results of this analysis are explored and discussed in this paper using real cases of how banks might apply stress as a consequence of the Covid-19 crisis and, therefore, how observing both the input factors and results of the stressed portfolios on values and liquidity can guide future portfolios’ strategies and ultimately, portfolio stability.