January BALM Newsletter preview - Introduction to Reverse Stress Testing by Roderick Powell, FRM of Chicago Risk Advisors. In this important article Mr. Powell discusses the 2007 and 2008 financial crisis which led to an awareness of tail risk events. These tail risk events are rare, but high impact events. Asset/liability managers have traditionally focused their attention on more frequent less impactful economic and market events that can disrupt, but not fatally cripple, their banking organizations. Regulators have for some time now strongly advocated the use of more frequent and robust stress tests to assess vulnerability to tail risk. Mr. Powell identifies two general types of stress tests including Forward Stress tests and a Reverse Stress test analysis. He describes and gives examples of both. He goes on to profile how management can develop the following 3 scenarios that could lead to significant institutional monetary loss:

·         Parallel Yield Curve Shock of 100 bps:

·         Commercial Real Estate Debacle:

·         Reduction in Funding Liquidity:

Mr. Powell reiterates that reverse stress testing is a powerful complement to forward or traditional stress testing. This novel approach forces management to think about the various events that could cause their bank severe or fatal financial distress. Knowledge gained from conducting reverse stress tests may prove invaluable in helping banks guard themselves against tail risk. To read a summary profile of this upcoming article please click on January 2011 BALM Preview article in our document library below.

The BALM Newsletter Software Survey is now available. This important listing exhibits the most widely used, commercially available asset/liability management software models used in financial institutions today. The listing is comprised of ALM software priced under $10,000, software from $10,000-$50,000, and more complex software models priced over $50,000. The survey also provides specific capabilities, including costs and hardware requirements for each vendor’s offering. The models exhibited in this list provide tools for identifying specific interest rate risk characteristics, transfer pricing solutions, auditing controls, budget development, and more. The software survey and accompanying literature summarizes several essential criteria to be considered prior to purchasing ALM software. To order a copy of the current BALM Software Survey Click Here