Stress Testing, Scenario Design and Capital Resilience

Stress design should be narrative before it becomes numeric

Strong ICAAP stress testing starts with plausible but severe narratives. Only after the narrative is coherent should the institution translate it into credit costs, margin pressure, valuation losses, expense shifts, or capital deductions.

The practical scenario hierarchy

Institutions typically need at least:

• a base view aligned to planning
• an adverse scenario showing pressure but ongoing viability
• a severe scenario testing resilience limits
• a reverse stress that identifies the conditions under which the model breaks

Management actions must be credible

Capital resilience is not improved by listing generic actions. The document should distinguish immediate actions, contingent actions, and constrained actions, and should explain who authorises them and on what evidence.