Stress Testing for Financial Institutions: Going Beyond Regulatory Compliance
Abhishek Ranjan • March 15, 2015
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Banks and financial institutions the world over are consistently grappling with the fear of the unknown. Finding stability in an unstable world dates back to the Great Depression in 1929. History is riddled with upheavals that have adversely impacted economic balances. Volatile markets and evolving risk environments make modern banking a risky business. Huge amounts of money and time have been invested in stress testing and risk compliance, while minimal investment has been made in developing strategic enterprise-wide capability.
According to a leading analyst firm, it is estimated that in 2015, the top 30 banks will spend more than $10 Billion on regulatory initiatives, with $2.5 Billion focused on enterprise stress testing. Recent patterns on the utilization of the allocation for stress testing have been less than 50 percent. The reasons for the underutilization and the lack of focus can be attributed to:
The extreme focus on regulatory compliance leaves little time for stress testing.
The categorization of stress testing as a discretionary spend – not a business must-have.
The absence of easy-to-run and easy-to-report stress test systems.
According to Craig Focardi, Senior Research Director, CEB Tower Group
“Financial services institutions (FSIs) already perform a number of forward-looking scenario forecasts for loss reserving, financial planning, line of business capital allocation, and regulatory capital requirements. Multiple, disparate systems support these processes. What has not been put in place is an integrated platform that allows executives to make actionable decisions by shocking the bank’s forecasted Profit and Loss “PnL” elements.Specifically, FSIs need to utilize this information more deeply to support product-specific growth initiatives at the product, line of business and geographic level to optimize capital allocation and maximize enterprise profit opportunities across the enterprise. In order to achieve these goals, FSIs require a streamlined, end to end platform that incorporates the most important sources of transaction data, namely the general ledger and rolled up PnL; real time predictive analytics; and intuitive user interfaces to consume the resulting information, to capture new revenue generating or cost reducing opportunities”
Current stress testing methodologies are significantly person dependent and leverage spread sheets or such obsolete technologies. These methods do not yield the real-time intelligence which modern banking organizations require. What the banking industry needs is a solution that can simulate shocks of financial data in order to take more reliable, forward-looking business decisions based on real-time analysis and state-of-the-art dashboards.
You need to ask these questions if you want to go beyond the mandated stress testing:
How can you leverage predictive analysis to assess the impact of new scenarios on future profit and loss?
How can banks integrate LOB level data and perform test at an enterprise level?
How can the stress test process be made automated, repeatable and auditable?
How can banks utilize the money spent on regulation to predict business decisions?
In my opinion, there is a lack of comprehensive custom enterprise solutions for stress analytics in banking. In conjunction with that, there is a need for real-time, cost efficient results made available to CXOs any-time, any-where and on any device. Additionally, current stress testing methodologies leverage obsolete technologies that are incapable of yielding the real time intelligence that modern banking organizations require. The modern banking industry needs a solution that can simulate shocks of financial data in real-time whilst supporting business growth.
In this whitepaper, you will learn and understand the modernbank’s portfolio stress testing requirements.
Abhishek Ranjan heads the CSR, Sustainability, D&I and Employee Outreach at Brillio. He also serves as the Managing Trustee of the Brillio Foundation. He was named as one of the “100 Most Impactful CSR Leaders (Global Listing)” at the World CSR Congress in 2016.