Citibank 2015 Annual Report Download - page 127

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Stress Testing
Citi performs stress testing on a regular basis to estimate the impact of
extreme market movements. It is performed on individual positions and
trading portfolios, as well as in aggregate, inclusive of multiple trading
portfolios. Citi’s Market Risk management, after consultations with the
businesses, develops both systemic and specific stress scenarios, reviews the
output of periodic stress testing exercises, and uses the information to assess
the ongoing appropriateness of exposure levels and limits. Citi uses two
complementary approaches to market risk stress testing across all major
risk factors (i.e., equity, foreign exchange, commodity, interest rate and
credit spreads): top-down systemic stresses and bottom-up business specific
stresses. Systemic stresses are designed to quantify the potential impact of
extreme market movements on an institution-wide basis, and are constructed
using both historical periods of market stress and projections of adverse
economic scenarios. Business specific stresses are designed to probe the risks
of particular portfolios and market segments, especially those risks that are
not fully captured in VAR and systemic stresses.
The systemic stress scenarios and business specific stress scenarios at
Citi are used in several reports reviewed by senior management and also to
calculate internal risk capital for trading market risk. In general, changes in
market factors are defined over a one-year horizon. However, for the purpose
of calculating internal risk capital, changes in a very limited number of
the most liquid market factors are defined over a shorter three-month
horizon. The limited set of market factors subject to the shorter three-month
time horizon are those that in management’s judgment have historically
remained very liquid during financial crises, even as the trading liquidity of
most other market factors materially decreased.