What should the output of the scenario analyses include?
Institutions may perform a variety of stress tests and sensitivity analyses throughout the year. These analyses focus on specific aspects of the institution’s operations. The output is dependent on the purposes and goals of those tests and analyses. The results of the more comprehensive stress tests that are usually part of the business planning process are expected to flow through the institution’s financial statements and performance ratios. This stress testing analysis should be more than a set of risk rating/probability of default migration tables. The results of a baseline or most likely scenario should be compared to alternative stress scenarios by comparing key balance sheet and income statement items, as well as earnings, capital and liquidity ratios. A complete discussion of the results, including potential management responses, should be included in the output analysis.
