Even as stress testing matures, gaps in technology and coordination remain

By Tom Kimner, Head of Global Operations for Risk Management, SAS

As we all know, during the recent financial crisis historical stress testing programs proved to be inadequate at ensuring that banks were well capitalized in widespread, severely adverse economic scenarios. Because of this, regulators and lawmakers – trying to guard against a collapse of the financial system – almost immediately targeted the largest banks, requiring them to provide more transparency on how they determine their capital levels and protect themselves from financial failure.

Read the report: Stress Testing: A View from the Trenches

Not only have banks had to revamp and enhance their quantitative risk management programs by strengthening their stress-testing capabilities, they’ve also had to demonstrate that their qualitative programs – policies and procedures, capital planning, and oversight – are all sound, demonstrable and well documented.

But even with significant investments in people and a number of process improvements over the last few years, banks still recognize that they are not as robust and mature as they need to be in terms of their technology. They also are not fully satisfied with the level of information reporting and coordination across the enterprise.

These gaps were identified in a recent survey conducted by the Global Association of Risk Professionals (GARP) and SAS. The survey, conducted in the spring of 2015, reflects the state of stress testing from the perspective of risk professionals, with participation from nearly 400 global executives and practitioners directly or closely involved in the stress-testing process.

Stress Testing: A View from the Trenches

Technology gaps in bank stress testing

Practitioner and executive perceptions universally identified gaps across technology, especially when compared to the relative strengths of people and expertise. Gaps in information reporting and coordination were also identified by practitioners and executives but were more pronounced in less mature financial institutions.

These two areas are critical gaps for organizations to overcome as they try and improve their stress testing programs. The increasing demands of regulators, including the current emphasis on iterative and responsive follow-up with further detail and more complex scenarios, cannot be addressed simply by adding more people to the equation. Investments in technology – computation power, implementation platforms, aggregation and reporting systems – must be made to not only keep up with the demands of compliance but also to help inform ongoing business decisions.

In addition, reporting and communication improvements – especially in ensuring consistency and transparency – can be addressed to a large extent with technology as well. For example, new software solutions from SAS can help with the overall orchestration of a stress testing program, ensuring that individual processes are run properly and that an overall level of governance guides the program from beginning to end.

Stress testing can be a highly complex endeavor requiring a systematic and repeatable process. Banks are finding that they better understand how to address regulatory needs today than they did even a few years ago. They also recognize that even though they have made investments in people and are building up their levels of expertise, they still need to make additional investments in technology to help them:

  • Manage large amounts of granular data
  • Implement models
  • Aggregate and share results
  • Govern the overall process, and
  • Communicate across various parts of the organization.

Tom Kimner

Tom Kimner leads Risk Operations and Pre-sales for SAS Risk Research and Quantitative Solutions. He is responsible for executing the overall risk management strategy by leading and coordinating the division’s marketing and communications functions. Prior to joining SAS, Mr. Kimner spent the bulk of his career at Fannie Mae in various senior management roles spearheading corporate initiatives to more effectively manage credit and financial risk. Mr. Kimner has testified before the Financial Services Committee of the U.S. House of Representatives and regularly speaks at Risk Conferences and other SAS hosted events.

GARP Survey on Stress Testing

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