Black Diamond Risk Enterprises (BDRE) provides business risk consulting service where business risk refers to such things as uncertainty about the demand for products, the price that can be charged for those products, or the cost of producing and delivering products. In the world of manufacturing, for instance, business risk is largely managed through core tasks of management, e.g., choices about channels, products, suppliers and how products are marketed, etc.
Business risk is affected by such factors as the quality of the firm’s strategy and/or its reputation as well as other factors. Therefore, it is common practice to view strategic and reputation risks as components of business risk. Risk literature sometimes refers to a combination of business, strategic and reputation risk. BDRE differentiates these three components.
Black Diamond Business Risk Services Include:
Stress Testing and Scenario Analysis
Black Diamond Risk Enterprises (BDRE) works with firms to help upgrade their approach to Stress testing. Stress Testing and Scenario Analysis are used to determine the size of potential losses related to specific extreme events that lie outside of normal market conditions.
Challenge: Managing Risk in Stress Markets
Solution: Construct Relevant Stress Scenarios
Example: Historical Stress Test (2007/2009 Financial Crises)
Supervisory Stress Testing of Bank Holding Companies
Dodd-Frank Act Stress Test :Supervisory Stress Test Methodology
The Federal Reserve expects large, complex bank holding companies (BHCs) to hold sufficient capital to continue lending to support real economic activity, even under adverse economic conditions. Stress testing is one tool that helps bank supervisors to measure whether a BHC has enough capital to support its operations throughout periods of stress.
In the wake of the financial crisis, the Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which requires the Federal Reserve to conduct an annual stress test of large BHCs and all nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) for Federal Reserve supervision to evaluate whether they have sufficient capital to absorb losses resulting from adverse economic conditions. The Dodd-Frank Act also requires BHCs and other financial companies supervised by the Federal Reserve to conduct their own stress tests. The Federal Reserve adopted rules implementing these requirements in October 2012.
The Dodd-Frank Act requires the Federal Reserve to conduct an annual supervisory stress test of BHCs with $50 billion or more in total consolidated assets and nonbank financial companies designated by the FSOC for Federal Reserve supervision (collectively, “covered companies”). The Dodd-Frank Act also requires covered companies to conduct their own stress tests (company-run stress tests) semiannually. Together, the Dodd-Frank Act supervisory stress tests and the company-run stress tests are intended to provide BHC management and boards of directors, the public, and supervisors with forward-looking information to help identify downside risks and the potential effect of adverse conditions on capital adequacy of these large banking organizations. The Federal Reserve adopted rules implementing these requirements in October 2012.
Under the Dodd-Frank Act stress test rules, the Federal Reserve conducts annual supervisory stress tests to evaluate whether a covered company has the capital, on a total consolidated basis, necessary to absorb losses and continue its operations by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve as a credit intermediary under adverse economic and financial conditions. As part of this supervisory stress test for each covered company, the Federal Reserve projects revenue, expenses, losses, and resulting post-stress capital levels, regulatory capital ratios, and the tier 1 common ratio under three scenarios (baseline, adverse, and severely adverse).
The Federal Reserve generally uses a common set of scenarios for all covered companies in the supervisory stress test. However, the Federal Reserve may use additional scenarios or components of scenarios for all or a subset of the covered companies to capture salient sources of risk, and these scenarios may use data from dates other than the end of the third quarter. In DFAST 2013, large, complex BHCs with significant trading activities are subject to a global market shock that reflects general market stress and heightened uncertainty, which affects trading positions and elevates counterparty credit risk.
The Dodd-Frank Act codified the Federal Reserve’s practice of disclosing a summary of the results of its supervisory stress test.
Company-Run Stress Tests
As required by the Dodd-Frank Act, the Federal Reserve’s stress test rules require covered companies to conduct two company-run stress tests each year. In conducting the “annual” test, a covered company uses data as of September 30 and reports its stress test results to the Federal Reserve by January 5. In addition, a covered company must conduct a “midcycle” test and report the results to the Federal Reserve by July 5. The Dodd-Frank Act stress test rules align the timing of annual company-run stress tests with the annual supervisory stress tests of covered companies.
In their annual stress tests, covered companies subject to the Dodd-Frank Act stress test rules must use the scenarios provided by the Federal Reserve. Each year, the Federal Reserve will provide at least three scenarios—baseline, adverse, and severely adverse—that are identical to the scenarios the Federal Reserve uses in the annual supervisory stress tests of covered companies.
By providing a common set of scenarios to all firms, the results of company-run and supervisory stress tests will be based on comparable underlying assumptions. To further enhance comparability, the supervisory stress tests and company-run stress tests conducted under the Dodd-Frank stress test rules use the same set of capital action assumptions. According to these assumptions, over the nine-quarter planning horizon, each BHC maintains its common stock dividend payments at the same level as the previous year; scheduled dividend, interest or principal payments on any other capital instrument eligible for inclusion in the numerator of a regulatory capital ratio are assumed to be paid; but repurchases of such capital instruments and issuance of stock is assumed to be zero.
Finally, each covered company must publicly disclose a summary of the results of its company-run stress test under the severely adverse scenario provided by the Federal Reserve.
Subject Matter Expertise / Testimony
Black Diamond Risk Enterprises (BDRE) provides expert testimony in a variety of risk related areas. BDRE professionals are experienced, credentialed, articulate industry veterans who are passionate about the business of risk.
Subject Matter Expertise/ Testimony is a part of the following services:
Value at Risk (VaR)
Black Diamond Risk Enterprises (BDRE) provides Business Risk Value at Risk (VaR) services in many forms. We define business VaR as the worst case loss that might be expected from a portfolio of exposures over a given period of time at a specified level of probability. As such,business VaR offers a probability statement about the potential change in the value of a portfolio resulting from a change in market factors over a specified period of time.
Black Diamond Risk Enterprises (BDRE) understands the nuanced nature of broker/client and vendor/client relations. BDRE provides an independent, objective evaluation of service provider selection, performance and contractual agreements. We recognize that developing or improving a relationship with a service provider requires a clear understanding of your needs, expectations, objectives, operations and strategy.
An efficient, informed vendor selection process requires objective factual information unbiased by personal relationships. It carries profound implications which may lead to changes in current compensation, services, expectations (Service Level Agreements & Stewardship Reports), management reporting and more.