Large Bank Examination Workshop February 2026

Stress Testing and Model Risk • But stress testing is also important in model risk management. • In particular, effective stress tests are an essential element of model development and model validation (essentially, ongoing monitoring and review). • For valuation models, two types of test are relevant:  Portfolio stress test: What impact would an unlikely but plausible adverse scenario have on the value of the portfolio?  Model stress test: checking performance over a wide range of inputs and parameter values in order to verify that the model is robust and understanding when it breaks down.

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Model Stress and Stability Tests • The examples we have given so far are about portfolio stress tests for valuation models.

• At least, if not more, important in model development and validation are model stress tests for robustness and stability.

• How should such tests be conducted?

• What warning signs should we look for?

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