Perform Credit Risk Analysis with Forecast Times

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What is Stress Testing?

Stress testing involves highly complex, computer-generated simulation models that use hypothetical scenarios as their testing framework – analyzing how an organization’s balance sheet responds to specific situations. Financial institutions often face fundamental challenges in the way that they project for the assets and liabilities in their portfolios under stressed conditions. The SAS Stress Testing Solution can make the process easier. One key feature of the solution is the ability to use forecast times for which a user can perform a credit risk analysis.

How does SAS Stress Testing support analysis with forecast times?

With the SAS Stress Testing Solution, you can use the provided SAS Stress Testing scenarios to perform credit risk analysis with forecast times. A forecast time (FT) is a future time for which a credit risk analysis is performed. It is equivalent to a new base date.

SAS Stress Testing supports two approaches for handling scenarios for forecast times:

• Divergent scenarios:
  • Perform an analysis in which each scenario of a given scenario type corresponds to a single forecast time.
  • The following are the sample divergent scenario sets:
    • ST Adverse ScenSet 2018.12
    • ST Adverse ScenSet 2019.01
    • ST Basecase ScenSet 2018.12
    • ST Basecase ScenSet 2019.01
• Common scenarios:
  • Perform an analysis in which each scenario of a given scenario type corresponds to all forecast times.
  • The following are the sample common scenario sets:
    • ST ScenarioSet 2018.12
    • ST ScenarioSet 2019.01

How does SAS Risk Factor Manager come into play?

SAS Risk Factor Manger is where all the scenario sets are housed. To view the scenario sets, navigate to the Scenario Manager page within the Risk Factor Manager solution and click the Scenario Sets tab.

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To view which scenarios are part of a scenario set, double click one of the scenario sets from the list above, and you will see a list of all the scenarios (see screen capture below) that can be used for forecast times during credit risk analysis.

Example of a credit risk analysis that uses a forecast time

This example illustrates a credit risk analysis that uses a forecast time of one month.

If the current base date is 31DEC2018 and the FT=1 month, then:

• the new base date for the FT=1 analysis would be 31JAN2019
• the portfolio data is the portfolio for the 31DEC2018 base date with some possible modifications such as the addition of synthetic instruments
• the scenarios are added or updated for the 31JAN2019 base date. The updated scenario data might be identical to the scenario data for the current analysis base date (FT=0) but with a shock to the economic factors at the forecast time horizon (horizon=1)

If your credit risk results contain multiple horizons, you can compare the cumulative output variables (for example, ECL_Lifetime) across forecast times by using the horizon forecast time (HORIZON_FORECAST_TIME) variable. The horizon forecast time variable is the value of each horizon relative to a given forecast time's starting horizon.

Note that HORIZON_FORECAST_TIME = Horizon - Forecast Time. For example, if the Horizon=1 and the FT=1, then the HORIZON_FORECAST_TIME=0. If the Horizon=1 and the FT=2, then the HORIZON_FORECAST_TIME=-1, etc.

How do you incorporate the scenario sets for forecast time in SAS Stress Testing?

Once the user reaches the credit risk analysis portion of the SAS Stress Testing workflow, there is an option to select the Risk Scenario Sets (see screen captures below).

In the Risk Scenario Sets window (shown above), the user would select Add existing scenario, and a window then appears (see screen capture below) showing all the scenario sets that are available to choose from to use for the credit risk analysis.

The user would choose any scenario set that corresponds to the base date of the cycle and execute the script to run the credit risk analysis.

To Learn More

To learn more about how you can utilize the SAS Stress Testing solution for your institution, there is an upcoming SAS Stress Testing course that will explain all the solution’s features. In the meantime, see SAS Help Center: Welcome to SAS Stress Testing for more details on the solution including how you can use it to perform credit risk analysis with forecast times. Please note that you must contact SAS for an access key to be able to review this user’s guide.

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