Insights and Publications

Leveraging Independent Shock Models

July 31, 2016

Data monitoring and contingency planning for unexpected circumstances has always been important for any business – whether your organization is a bank, non-bank lender, private equity firm, or even a financial services consulting firm, such as Bridgeforce. However, in light of recent events in the global economic and political ecosystem – most notably the British Exit from the European Union – effective contingency planning becomes even more essential.

Contingency planning activities identify areas of exposure, assess impact, and identify mitigation strategies to ensure restoration to normal modes of operation with minimal cost and disruption. One tool regularly utilized in contingency planning are shock models. Shock models identify potential sources of exposure, their impact across various scenarios and determine when it would be appropriate to trigger a contingency plan. Shock models also show the longer term outlook of the business in various scenarios, accounting for contingency actions taken.

Shock models have many different use cases, including:

  • Investors pursuing new ventures
  • Operations managers looking to forecast collections needs or marketing activities
  • Credit ratings agencies handling an IPO

Types of Shock Models

Various types of shock models exist to provide insights into the stability and resilience of a business model. Examples of shock models include:

  • Interest Rate Movements
  • Liquidity
  • Delinquency / Losses
  • Prepayment Speeds / Duration
  • Funding Rates
  • Collateral / Underlying Security Values
  • Intangibles
  • Earnings Volatility

While these shock models are all used by different stakeholders, they help demonstrate a robust business model and diminish the impact of uncertainty. These models are important for financial institutions while seeking investment and conducting internal business planning. Download the full white paper, Leveraging Independent Shock Models, to read more about the various types of shock models and how they can help you with your risk management, operational risk, and due diligence functions.