By Dr Jörg Drüen, product manager at Fernbach Software

As recovery is in sight, attention has turned to preventing a crisis of such magnitude from occurring again. The consequence of which has led to greater scrutiny of risk management, in particular an increased focus on stress testing. As the regulators continue to review bank’s risk management processes, the Basel Committee and the Committee of European Banking Supervisors (CEBS) have both issued consultation papers calling for banks to perform reverse stress testing in addition to regular stress testing. While conventional stress testing erratically defines potential losses and juxtaposes them with the risk capital, reverse stress testing makes it possible to determine the actual risk area. Taking a deeper look into this risk area we find that great care must be taken when valuating the utilisation rate of risk capital (for example, in limit systems). Capital utilisation that comes in at well under 100% is not necessarily an indicator of a comfortable risk structure.

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