Unmasking Black Swans March 2015 Gil & Associates

Snow-Ball Effects 2 What stress test should do: Include historical and unprecedented scenarios Stretch over multiple periods Capture snow-ball style consequences Address change in correlations during stress Provide early warning signals for contingency planning

Gil & Associates Simulation Based Scenario Generation 3 Reverse Historical Hypothetic Institution – Specific Multi – Event Global Jan-151-Jun-151-Jan-16 Jump Diffusion process continues Macroeconomic Regime ChangeTypes of Scenarios

Gil & Associates Consistent Measurement of Capital and Liquidity 4 PORTFOLIO SYNTHESIS - PERFORMANCE LINKED TO ECONOMIC SCENARIOS SIMULATED SCENARIOS AS 3-D NODES Paths thousands of scenarios generated at every time point Macro and Market Variables economic growth rates, interest rates, credit spreads, equity market performance, etc. Time Indicators of Portfolio Performance Paths

Gil & Associates Loan Loss Projections on Macroeconomic Scenarios 5 Portfolio Losses Macro Factors Systematic Component Idiosyncratic Component Credit Spreads CorrelationsLGDPD Simulated shocks Credit spread dynamics Feedback loop Credit Spreads

Gil & Associates Contingency Planning 6 6 You Are Here Time “Stable” scenarios with higher initial likelihood Disruptive events; periods of market turmoil and rapidly changing correlations “Asset bubbles” and bull markets; periods of rapid market increases