Our Stress and Scenario Testing (SST) service provides outcomes at loan by loan level under a range of macroeconomic scenarios. We have long provided SST for major lenders, taking data e.g. monthly or quarterly, uploaded to our secure website and placing the results, bespoke to the client’s requirements, to the site for retrieval. Typically, the process takes only a few days, although the initial test usually takes a little longer whilst data issues are resolved.

Using our real past downturn default and loss data, from the 1989-1881 housing crisis, we are able to forecast the Probability of Possession (PP) and the Loss in the Event of Possession (LIEP) under any one of the four standard scenarios pertaining in our downturn default database. Loan to Value (LTV) and loan seasoning are the key drivers for Dr Satchell’s SST hazard rates, employed to forecast the PP for each loan. SST then forecasts LIEP for each loan, typically for each year over a 10 year period, with output to meet client needs. Where a result is required for a scenario (say unemployment at 12%) that varies from the rate applicable to the selected SST scenario (10% in the above “worst case”), we employ output from our UKAPF model to vary the hazard rate as necessary.

SST requires revaluation of each property for which, as standard, we use Acadametrics Prices and Transactions (APAT), based upon the factual Land Registry data. SST is flexible and revaluation can be based on: a client-specified index; Zoopla data (which we particularly offer and can provide rental prices and yields and current distressed values to complement our historic loss data); the client’s AVM.

A Prospectus of the service is provided here. The loan data upon which the analysis is based are listed here. The results exampled here can either stand alone as reference points or be dovetailed with the lender’s own modelling solutions and assumptions. An overhead presentation of our service is provided here and the methodology is set out here.

The June 2009 FSA Consultation Paper CP09/17 A Specialist Sourcebook for Building Societies: Enhanced supervisory guidance on financial and credit risk management follows the FSA statement on its use of stress tests 28 May 2009 in setting out current FSA stress testing policy. They follow, in turn, the December 2008 FSA “CP/08: Stress and scenario testing” paper and the FSA “Stress Testing Thematic Review” letter to Chief Executives of October 2008 which set out earlier FSA thinking regarding stress and scenario testing. The letter, CP/O8 and some relevant past papers on from CEBS and FSA papers are shown on our Reference page, and further guidelines are provided here.