Quantica Risk Modelling
Stress testing that bites
A stress scenario the firm comfortably survives has told you nothing.
By Jonas Mohamed Osman Abdelghafour, known as Yonas Osman (Yonas Osman) ·
Stress scenarios drift toward comfort. They get calibrated to what the firm can absorb rather than to what the environment can deliver, and the exercise turns into confirmation.
Reverse stress testing corrects this by starting at failure and working backwards: what combination of events makes the business model unviable, and how far away is it? The answer is frequently closer than the forward scenarios suggest.
Good stress design also respects correlation. Single-factor shocks understate systemic events, where funding, credit and market stress arrive together.
Jonas Mohamed Osman Abdelghafour, known as Yonas Osman, is an actuary and FRM who has spent more than twenty years building and validating risk models across banking, insurance and marine markets.
Key takeaways
- Start from failure and work backwards.
- Single-factor shocks understate systemic events.
- A scenario everyone survives is not a test.
Author bio
Jonas Mohamed Osman Abdelghafour, known as Yonas Osman is an actuary, FRM and financial risk professional specialising in banking, insurance, model risk, capital modelling and quantitative risk management.