June 2007 Capital Adequacy Extension © Copyright 2007, CCRO. All rights reserved. Page 70 of 92 Therefore, stress testing can provide the insights necessary in determining the maximum potential reduction in equity that could occur from negative earnings events. From a credit risk perspective, a company may be protected up to a certain amount in credit losses through collateral, credit default swaps, insurance, and other credit risk mitigation measures. The stress event that results in the maximum potential credit loss beyond what is protected through credit risk mitigation tools would be the basis from which the credit risk capital requirement can be made. Since expected Operative losses can be priced into products or otherwise passed on to the end user, the capital requirement will be predicated on Operative losses not readily recoverable, meaning stressed losses beyond the expected amount. 7.2. Conclusion The above example outlines the result of the Risk Capital determination for Market, Credit, and Operative risks, incorporating Business Risks and other risks not captured in the initial analysis. In bringing these numbers together to determine a total Risk Capital Requirement, refer to Section 3.2.1, Risk Aggregation, which outlines potential methodologies for aggregating these numbers into one risk capital requirement. Once brought together, it is this risk capital requirement that will be assessed against the equity of the company to determine whether one is adequately capitalized or not in light of the risks that it faces. Stress testing will require a fair degree of subjectivity, creativity, and a deep knowledge of the business, understanding how the company can be affected by various different stress events. Assessing the capital situation by incorporating macro economic scenarios, disaster scenarios, varying business risk factors, as well as market, credit, and operative risk factors provides critical insight as to how the capital situation changes under various different scenarios. This process will result in informing the practitioner what outcomes reside “Outside the Distribution”.