By Sim Johal, Head of Asia-Pacific
Stress testing in the financial sector has never been more critical. In the constantly evolving Asian market, simulated severe economic situations underpin prudent risk management practices. TS Imagine runs billions of stress tests for clients each year. In Asia alone in 2023, TS Imagine ran more than 5 billion stress tests each month. Check out a quick demonstration of our stress tests in action here.
Several years ago, we established a large language model we call Pulse. It allows us to quickly access all kinds of historical data, observe trends amongst our users, and much more. Given the current focus on risk management, we tapped into Pulse to view the most frequent stress tests run by our Asia-based clients in 2023. Below we analyze the drivers for each. All client data has been anonymized.
#1: COVID-19 Pandemic
That Asia-based clients still consider COVID-19 a top stressor should come as a surprise to no one. It was the ultimate black swan event, testing the limits of every financial entity in the world.
Financial institutions had to be agile, adjusting their stress tests on the fly to accurately simulate the impact of the pandemic on markets. From liquidity crunches to supply chain disruptions, banks, asset managers, hedge funds, and insurers reimagined their worst-case scenarios, learning numerous lessons along the way.
COVID means different things to different industries and different countries, especially within Asia. There were also distinct phases to the pandemic. Our stress testing is sophisticated enough to support custom time ranges, allowing clients to focus on the key dates that affect their portfolio.
#2 Archegos Capital Management
While not a surprise in retrospect, at the time, the Archegos Capital Management fallout was an eye-opener for the Asian financial sector. It revealed how the unchecked leveraging by a single entity can have far-reaching effects on market stability.
There was a huge impact in terms of rates and fixed income, and there were segments of the technology and financial services industries that were heavily impacted. This stress test also highlights how betas can stress in extreme market conditions and the importance for capturing the link between different industries. We expose these analytics to our clients who can dig into the shocking mechanism within the stress test and understand with complete transparency how their portfolio would have reacted to Archegos.
#3 The Lehman Brothers Collapse
The Lehman Brothers Collapse was a turning point in global finance and the genesis of modern stress testing. Asia, closely knit into the international financial system, did not emerge unscathed. However, the proactive measures taken post-Lehman have revolutionized how Asian institutions prepare for systemic shocks.
The key to effective stress testing relating to Lehman is accurately representing stress tests from 2008. This is only possible with historical data. Thanks to our decades-long history, we have the data from 2008.
#4 Chinese Market Equities Crash of 2015 and 2016
The Chinese equities market crash underscored the immense influence of speculative trading on market volatility. For clients with large, long-only stock portfolios spread across Asian countries and exchanges, this ends up being a key stress test. The most direct impact was to the Shanghai Stock Exchange, so we built a full market picture via relevant betas to every other Asian and global exchange. RiskSmart can isolate individual exchanges or currency specific stresses that may have occurred and present clients a stressed P&L in their chosen reporting currency that reflects the overall stress test as well as the real currency impact that would have occurred.
#5 Asian Financial Crisis of 1997
The Asian Financial Crisis was a textbook example of how currency volatility can snowball into a full-blown economic catastrophe. Asian stress tests continue to evolve by focusing on currency devaluation scenarios, not just in the Asian context but across emerging markets globally. This has led to more sophisticated exchange rate modeling and cross-border policy adaptations, ensuring that institutions are better equipped to deal with the “butterfly effect” of currency fluctuations going forward.
Conclusion
Each of these market shocks has profoundly influenced Asian financial markets. By actively engaging with these stress tests, financial institutions are not simply ensuring survival—they are setting the stage for a future where adaptability, data-driven decision-making, and strategic foresight are the cornerstones of financial resilience. For RiskSmart and TS One clients, there is no additional work: they can fire up the system, bring up their portfolio and view their real time stress tests.