Banking: Stress testing and scenario analysis

How can XDI help?

• Choose a stress testing approach to suit your needs
• Explore common scenarios including RCPs and NGFS
• Use our metrics as inputs to Probability of Default, Loss Given Default and Expected Credit Losses
• Avoid shortcomings of insurance-based historical loss data
• Engage our innovation teams to assist with deterministic scenarios

In this use case, XDI used statistical approaches to provide the client with damage distribution ratios and synthetic vulnerability functions which could be incorporated into its core stress testing models.

Using a series of archetypes, XDI developed a set of synthetic vulnerability functions across a range of hazards available to represent the behaviour of these archetypes when exposed to various levels of hazard severity. 

XDI’s analysis enabled the client to provide specific solutions in line with the regulator’s requirements.

Results

XDI’s analysis enabled the bank to meet obligatory stress test requirements for physical climate risk assessment.

The use of synthetic vulnerability functions allowed the bank to avoid the ‘patchiness’ of traditional, insurance-based loss data, and helped the bank establish a robust and credible baseline for future stress tests and deeper dive analyses. 

What next?

The use of synthetic vulnerability functions is a powerful tool in stress testing use cases. XDI’s work in this area helps clients avoid some of the pitfalls associated with using traditional insurance loss data. The highly repeatable nature of the analysis meant the client was able to adopt XDI’s metrics as the basis for its physical climate risk appetite in each of its locations, globally.