Scenario Analysis and Stress Testing are used to evaluate how extreme, low-probability events would impact an organization’s financial stability and operations. [1]
Designing a Stress Test Lifecycle
Stress tests run operations through historical or hypothetical crises to locate hidden breaking points:
[Define Stress Scenario] ---> [Map Shock Parameters] ---> [Run Financial Models]
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[Adjust Risk Capacity] <--- [Identify Liquidity Breaks] <-----------+
- Historical Shocks: Testing how the organization would perform under a repeat of a past crisis, such as the 2008 financial collapse or the 2020 pandemic supply chain halts.
- Hypothetical Shocks: Modeling unprecedented disruptions, such as a complete shutdown of a critical cloud provider or a sudden trade embargo on key raw materials.
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