Bank of England’s System-Wide Exploratory Scenario (SWES) Using Acadia’s Open-Source Risk Framework

Executive Summary

This paper provides the results of an in-depth study on the NPV changes observed under the Bank of England’s SystemWide Exploratory Scenario (SWES) utilizing the Open-Source Risk Engine (ORE). The authors have proven that using ORE, the precise impact on NPV can be calculated for each instrument type within a portfolio and therefore the resulting Profit and Loss (P&L) can be produced. Having accurate insight into these scenarios enables firms to better manage their risk and counteract the negative effects of stress scenarios. Open-source applications, like ORE, can support an institution stress testing requirements.

Introduction

Following the 2008 Global Financial Crisis, prudential regulators worldwide implemented ways to enhance the resilience of financial institutions and prevent systemic risks. In the United States, the Federal Reserve introduced the Comprehensive Capital Analysis and Review (CCAR) and the Dodd-Frank Act Stress Test (DFAST) frameworks. CCAR evaluates the capital planning processes and adequacy of large U.S. bank holding companies, while DFAST assesses the ability of covered financial institutions to withstand adverse economic conditions. In the European Union, the European Banking Authority (EBA) conducts EU-wide stress tests to evaluate the capital positions of banks across member states under stressed scenarios. In the United Kingdom, the Bank of England (BoE) implements stress testing for UK banks, assessing their resilience to severe economic downturns. These stress testing regimes are important tools for regulatory authorities to ensure the robustness of financial institutions, foster risk management practices, and promote overall financial stability in the aftermath of the 2008 crisis.

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