Case Study on Stress Testing for an Asset Manager-Private Bank

Case study available here.

More information on the software used in the study here.

This note presents an illustrative case study of stress testing for an asset manager accomplished using Risk Control’s Stress ControllerTM software. The calculations are performed for a notional UK asset manager that is also engaged in private banking operations.

We show how the AUM (Assets Under Management), balance sheet, P&L and key capital planning ratios of the private bank-asset manager group are affected by scenarios involving (i) customer loss and (ii) a UK recession. A set of equations is constructed to describe the evolution of the asset manager’s financial statements.

The AUM is modelled in a region- and asset-class-specific fashion. This permits the user to calibrate the distributions of the AUM across regions and to employ appropriate sensitivities of the AUM in each region to appropriate geographically specific market variables (equity indices, interest rates, exchange rates and commodity prices).

The growth of each AUM class is forecast by taking into account (i) changes in relevant market prices and (ii) user-specified additional growth reflecting, for example, past trends in AUM market growth or anticipated marketing activities by the asset manager. The model allows the user to override forecasts by directly assuming particular levels of AUM growth for different components of the AUM asset class-region breakdown.

Revenue in the form of fees depends on the AUM forecasts described above. Users are able also to specify fee rate dynamics directly if they wish, calibrating either the relative growth or the absolute level of the future fee rate.

The results show how the asset manager’s AUM size, revenue growth, loan impairment provisions and capital are boosted or depressed by the different stress scenarios.