Front Cover -- Stress Testing for Risk Control under Basel II -- Copyright Page -- Table of Contents -- Preface -- Warning -- Part 1 Stress testing defined -- Chapter 1 The need for advanced testing methodology -- 1.1 Introduction -- 1.2 Risk distributions and extreme events -- 1.3 Model uncertainty in simulation and testing -- 1.4 Stress testing and the need for transparency -- 1.5 Stress testing and confidence intervals -- 1.6 Advanced testing methodology for better governance -- 1.7 An introduction to the role of information technology in gaining competitiveness -- Notes -- Chapter 2 Risk and its management -- 2.1 Introduction -- 2.2 Risk defined -- 2.3 Risk associated with the counterparty -- 2.4 Market risk and its variants -- 2.5 Risk appetite and risk aversion -- 2.6 Systemic risk and event risk -- 2.7 Developing a system for risk management -- Notes -- Chapter 3 The dynamics of stress testing -- 3.1 Introduction -- 3.2 Stress testing defined -- 3.3 Advanced testing and new financial instruments -- 3.4 What is the benefit of stress testing? -- 3.5 Scenarios, sensitivity analysis and statistical inference -- 3.6 Capital at risk under extreme conditions: an example -- 3.7 Stress testing and the devil's advocate -- 3.8 Advice on implementing the stress test -- Notes -- Chapter 4 Stress analysis and its tools -- 4.1 Introduction -- 4.2 The need for a scientific approach -- 4.3 Science and the scientific method -- 4.4 Fundamentals of stress analysis -- 4.5 Case studies with scenario analysis -- 4.6 Using the Delphi method -- 4.7 Stress evaluation through sensitivity analysis -- 4.8 Fundamentals of statistical inference -- Notes -- Chapter 5 Worst case scenarios and drills -- 5.1 Introduction -- 5.2 Worst cases happen when chance meets unpreparedness -- 5.3 A bird's-eye view of worst case analysis.

5.4 Impaired claims, credit risk and worst case -- 5.5 Why are worst case drills important? -- 5.6 A catastrophe drill undertaken by the International Monetary Fund in 2002 -- 5.7 The Federal Reserve's 'new bank' and the carry trade -- 5.8 The nature of worst case drills is polyvalent -- Notes -- Chapter 6 Technology strategy for advanced testing -- 6.1 Introduction -- 6.2 Managing a successful technology effort -- 6.3 Innovation and survival of the fittest -- 6.4 A phase-shift technology strategy -- 6.5 Re-engineering information technology is not an option -- it is a 'must' -- 6.6 Projecting and implementing an enterprise architecture -- 6.7 Strategic planning should account for information technology's deliverables -- Notes -- Part 2 Stress testing probability of default, loss given default and exposure at default -- Chapter 7 Models and procedures for the study of volatility patterns -- 7.1 Introduction -- 7.2 Volatility defined -- 7.3 Keeping volatility in perspective -- 7.4 Improving volatility models through heteroschedasticity -- 7.5 Procedural insufficiency among financial institutions and individual investors -- 7.6 Algorithmic insufficiency: a case study with value at risk -- 7.7 The volatility of credit ratings: a case study with General Motors and General Motors Acceptance Corporation -- 7.8 Risk estimates based on volatile probability of default -- Notes -- Chapter 8 Stress testing creditworthiness -- 8.1 Introduction -- 8.2 Credit risk defined -- 8.3 Credit standards and default likelihood -- 8.4 The discriminatory ability of power curves -- 8.5 The predictive power of distance to default -- 8.6 The risk of unwillingness to perform -- 8.7 Case study: the stakeholders of TeleDenmark -- 8.8 A lesson for stress testers: loss of creditworthiness has many fathers -- Notes -- Chapter 9 Stress probability of default -- 9.1 Introduction.

9.2 Probability of default and liquidity stress testing -- 9.3 Concentrations of exposure and credit risk measurement -- 9.4 Probability of default and stress probability of default -- 9.5 Estimating probability of default through probability of default buckets -- 9.6 Errors in probability of default estimates and the role of benchmarking -- 9.7 The many aspects of confidence placed on a test -- Notes -- Chapter 10 Stress loss given default and stress exposure at default -- 10.1 Introduction -- 10.2 Loss given default and exposure at default -- 10.3 The challenge of computing stress loss given default -- 10.4 Stress loss given default and ability to perform -- 10.5 Stress exposure at default -- 10.6 Point-in-time and through-the-cycle probability of default -- 10.7 Stress testing legal risk -- 10.8 Stress testing other operational risks -- Notes -- Chapter 11 Counterparty credit risk, transfer of credit risk and wrong-way risk -- 11.1 Introduction -- 11.2 Counterparty credit risk -- 11.3 Methods for handling counterparty credit risk -- 11.4 Expected positive exposure and cross-product netting -- 11.5 Maturity parameters -- 11.6 Credit risk mitigation: collateral and haircuts -- 11.7 Credit risk mitigation: new techniques -- 11.8 Double default: general and specific wrong-way risk -- Notes -- Part 3 Expected and unexpected losses -- Chapter 12 Stress testing expected losses -- 12.1 Introduction -- 12.2 Bird's-eye view of expected and unexpected losses -- 12.3 Stress testing regulatory capital requirements for expected losses -- 12.4 Back to basics: do we know the reason for credit losses? -- 12.5 Contribution of rating agencies to prognostication of expected losses -- 12.6 How to handle expected losses from lending -- 12.7 The results of the fifth Quantitative Impact Study -- 12.8 Thinking about models for credit risk.

12.9 Strengths and weaknesses of credit risk models -- Notes -- Chapter 13 Analysing the reasons for unexpected losses -- 13.1 Introduction -- 13.2 Unexpected risks confront every enterprise -- 13.3 Impact of macroeconomic developments -- 13.4 Risk drivers targeted by macro stress tests -- 13.5 Stress testing macroeconomic risks and opportunities -- 13.6 Stress testing financial instruments: a case study with interest rates -- 13.7 Stress testing for unexpected losses from business risk -- Notes -- Chapter 14 Economic capital and algorithms for stress testing unexpected losses -- 14.1 Introduction -- 14.2 Economic capital for credit rating and unexpected losses -- 14.3 Capital beyond loan-loss provisions -- 14.4 Wrong correlations magnify unexpected losses -- 14.5 The missing algorithm for unexpected losses -- 14.6 Qualitative scenario for unexpected losses -- 14.7 The board needs tools to appreciate the value of assets -- Notes -- Chapter 15 Stress testing leveraged and volatile financial assets -- 15.1 Introduction -- 15.2 Hedge funds: an industry born in the 1940s -- 15.3 Stress testing highly leveraged institutions -- 15.4 The proliferation of hedge funds and testing their risks -- 15.5 The exposure of credit institutions to highly leveraged institutions -- 15.6 Supervision of highly leveraged institutions -- 15.7 Highly leveraged institutions at the peak of their might: No! to regulation -- 15.8 The drama unfolds: highly leveraged institutions fire the boss of the Securities and Exchange Commission -- Notes -- Chapter 16 Advanced testing provides a basis for better governance -- 16.1 Introduction -- 16.2 A concept for better corporate governance -- 16.3 The contribution of strategic thinking -- 16.4 Use of threat curves and S-curves: an example from the insurance industry -- 16.5 An oil industry case study on risk factors and their background.

16.6 Pillar 2 and Pillar 3 require an enterprise-wide risk discipline -- 16.7 The exercise of market discipline is a significant step in supervision -- 16.8 Use of stress testing by central banks and regulators, for better governance reasons -- Notes -- Index.