This article outlines a framework for the analysis of extreme events based on forward-looking reverse stress testing. We carry out a portfolio simulation and identify stress scenarios which are critical for bank solvency as the ones contributing the most to cost of capital, as expressed by KVA...

Frontmatter -- Advance Praise for Reverse Stress Testing in Banking -- Acknowledgements -- Foreword -- Contents -- Part I: Fundamentals of Reverse Stress Testing -- 1 Reverse Stress Testing: A Versatile Thinking Tool -- 2 Reverse Stress Testing in Banks -- 3 Reverse Stress Testing: An Overview...

The industry is currently seeking to evolve collateral models based on Value-at-Risk to include Wrong-Way-Risk (WWR) add-ons. A parallel trend is to require risk managers to possess Reverse Stress Testing (RST) tools to identify extreme but plausible scenarios and hedge them pro-actively. Use...