Bank Financial & Stress Test Model

Cover Page

Model overview with bank name, analysis date, and key metrics. Covers bank identification, analysis scope and date and key metric summary.

Executive Summary

One-page overview of the bank's financial health and stress test results. Covers profitability overview, capital ratios summary, stress test results and key risk indicators.

Assumptions

Central assumptions for interest rates, credit quality, growth, and macro scenarios. Covers interest rate curve assumptions, credit loss projections, balance sheet growth rates and macro scenario parameters.

Historical Financials

Clean historical data including bank-specific line items and ratios. Covers net interest income history, fee income and expenses, provision for credit losses and historical ratio trends.

Income Statement

Projected bank P&L with NII, fee income, provisions, and operating expenses. Covers net interest income projection, non-interest income, provision for loan losses, operating expense forecast and pre-provision and net income.

Balance Sheet

Projected balance sheet with loan and deposit composition detail. Covers loan portfolio by type, investment securities, deposit base by type, wholesale funding and shareholders' equity.

Cash Flow Statement

Bank cash flow statement reflecting lending, funding, and investing activities. Covers operating cash flow, loan originations and repayments, deposit flows and investment activity.

NIM Analysis

Detailed net interest margin modeling with asset yield and funding cost decomposition. Covers asset yield by category, cost of funds by source, nim decomposition, rate sensitivity analysis and nim trend and projection.

Loan Portfolio

Granular loan portfolio analysis by product, risk grade, and vintage. Covers portfolio composition, risk grade distribution, vintage analysis, concentration metrics and npl ratios.

Deposit Analysis

Deposit base analysis with cost, stability, and concentration metrics. Covers deposit mix (casa vs. term), cost of deposits by type, deposit concentration and behavioral maturity estimates.

Loan Loss Provisioning

Credit loss modeling with PD, LGD, and EAD methodology aligned with IFRS 9 / CECL. Covers probability of default (pd), loss given default (lgd), exposure at default (ead), expected credit loss (ecl) and stage 1/2/3 classification.

Capital Adequacy

Basel III/IV capital ratio calculations with RWA decomposition. Covers cet1, tier 1, total capital ratios, risk-weighted assets by type, capital buffers (ccb, d-sib), leverage ratio and mrel / tlac where applicable.

Liquidity Analysis

Liquidity coverage and funding ratios per Basel III requirements. Covers lcr (liquidity coverage ratio), nsfr (net stable funding ratio), hqla composition, funding maturity profile and liquidity stress gaps.

ALCO Dashboard

Asset-Liability Committee dashboard with interest rate risk and balance sheet management metrics. Covers repricing gap analysis, duration gap, eve sensitivity, nii at risk and liquidity and capital overview.

Stress Test — Base

Base scenario stress test with moderate economic assumptions. Covers gdp growth and unemployment, interest rate path, credit loss projection and capital ratio impact.

Stress Test — Adverse

Adverse scenario with economic slowdown and credit deterioration. Covers recession assumptions, elevated default rates, nim compression and capital depletion analysis.

Stress Test — Severe

Severe scenario modeling a deep economic crisis with acute stress. Covers deep recession / crisis parameters, severe credit losses, funding stress, capital adequacy under severe stress and recovery timeline.

Error Checks

Model validation including balance sheet integrity and regulatory ratio verification. Covers balance sheet balance check, rwa reconciliation, ratio calculation verification and data consistency checks.

Net Interest Margin

NIM = (Interest Income − Interest Expense) / Average Earning Assets

The bank's core profitability metric — the spread earned on lending and investing activities after funding costs.

CET1 Ratio

CET1 = Common Equity Tier 1 Capital / Risk-Weighted Assets

The primary measure of bank capital strength under Basel III. Regulators typically require 4.5% minimum plus buffers.

Expected Credit Loss

ECL = PD × LGD × EAD

IFRS 9 / CECL credit loss calculation. Probability of Default × Loss Given Default × Exposure at Default for each loan or portfolio segment.

Liquidity Coverage Ratio

LCR = HQLA / Net Cash Outflows (30-day) ≥ 100%

Basel III liquidity requirement ensuring the bank holds enough high-quality liquid assets to survive a 30-day stress period.

1.Model the Bank's Balance Sheet Structure

Bank financial models differ fundamentally from corporate models because the balance sheet drives earnings, not the other way around. Start by building out the asset side — loans by segment (commercial, retail, mortgage, consumer), securities portfolio, and interbank assets. On the liability side, model deposits by type (demand, savings, time), wholesale funding, and subordinated debt. Understanding the composition and maturity profile of both sides is critical because net interest income — the bank's primary revenue source — is the spread between what assets earn and what liabilities cost.

2.Build the Net Interest Income Engine

NII is typically 60-80% of a bank's total revenue. Model it by applying average yields to each asset category and average costs to each funding source. The net interest margin (NIM) should be driven by rate assumptions, competitive dynamics, and balance sheet mix. Build in sensitivity to interest rate changes — a parallel shift in rates affects assets and liabilities differently depending on their duration and repricing characteristics. This rate sensitivity is the foundation for both earnings projections and stress testing.

3.Model Credit Risk and Provisions

Credit quality is what makes or breaks a bank. Build a provision for credit losses model that flows from loan portfolio quality to expected losses. Under IFRS 9 or CECL, this means estimating probability of default (PD), loss given default (LGD), and exposure at default (EAD) for each loan segment. In the base case, provisions reflect through-the-cycle norms. In stress scenarios, provision expense can spike dramatically — modeling this relationship accurately is essential for meaningful stress tests.

4.Calculate Regulatory Capital Ratios

Banks operate under strict capital adequacy requirements. Calculate risk-weighted assets (RWA) by applying regulatory risk weights to each asset class. Then compute CET1, Tier 1, and Total Capital ratios by dividing the relevant capital measures by RWA. These ratios determine whether the bank can pay dividends, buy back shares, or needs to raise capital. Your model should track these ratios dynamically across all scenarios, as regulators set minimum thresholds that the bank must maintain even under stress.

5.Design and Run Stress Scenarios

Stress testing translates macroeconomic shocks into bank-specific financial impacts. Define baseline, adverse, and severe scenarios with assumptions for GDP growth, unemployment, interest rates, property prices, and credit spreads. Then map these macro variables to the bank's financials — higher unemployment increases loan defaults, falling property prices reduce collateral values, rate changes affect NIM. The output should show how capital ratios, earnings, and liquidity evolve under each scenario, revealing whether the bank can absorb severe shocks without breaching regulatory minimums.