How can banks enhance ICAAP stress testing and scenario analysis to feed into effective capital planning?

Torsten Kleine-Buening

Chief Risk Officer at Xac Bank
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How can banks enhance ICAAP stress testing and scenario analysis to feed into effective capital planning?

28.02.2018 09:07 am

Ahead of the ICAAP Stress Testing and Capital Planning Conference, we spoke with Torsten Kleine-Buening, Chief Risk Officer from Xac Bank about how banks are enhancing ICAAP stress testing and scenario analysis to feed into effective capital planning.

Why is ICAAP stress testing such an important topic for banks particularly in relation to its links with capital management?

Stress testing provides banks with a complementary instrument to traditional analyses, used to assess present and developing risk profiles against the bank’s risk appetite, and to inform capital and liquidity planning.

Comprehensive stress testing approaches allow banks to consider both Pillar 1 risks – such as credit risk – and other risks related to capital planning. A sound understanding of risk interdependencies is critical.

I understand a big focus for banks right now is conducting granular entity level ICAAP stress tests. Would you say that is a big objective for your bank right now, and what other objectives has your bank set out to achieve?

It is true, banking groups and financial groups in general are moving towards entity-level stress tests. This is to some extent driven by the latest capital regulations.

Our financial group aims to perform both entity-level and group-level stress tests, which capture the differing risk profile perspectives of the banking, leasing and insurance businesses.

The overarching objective is to ensure sound capitalisation both at the entity level and at group level while achieving performance targets set by our shareholders.

What kinds of operational challenges do banks face when executing entity level ICAAP stress tests? What would be your approach to dealing with such challenges?

There are multiple operational challenges. The ability to share data across entities for stress testing purposes is sometimes lacking, and the varied entity models – often caused by regulatory requirements obligating use of local models that differ from Group-level models – can be a complicating factor.

In my experience, there is no silver bullet to solve these challenges – but good governance and expectation management can help to address these challenges and to ensure credible results are delivered.

It appears banks are working towards gaining more accurate and valuable assumptions from their ICAAP stress tests. Where do you suspect this will lead banks to and what will be the next steps that ICAAP stress testers should consider?

As I mentioned earlier, it is critical to understand the interdependencies between the different risk types and risk drivers.

In my view, banks will need to question underlying business assumptions through stress tests – and to quote an old but true statement – banks need to “ follow the money” when designing their stress test scenarios.

The scenario-design process can provide valuable insights and trigger debate; in some cases, this has had a bigger impact on capital planning than the actual outcome in numerical terms.

What would you like to achieve by attending the ICAAP Stress Testing and Capital Planning Conference?

Personally, I am looking forward to the conference as it will provide me with an opportunity to hear from peers and to learn about their practices and lessons learned.


For more information about this conference please visit the event website:

or contact Yiota Andreou at

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