GARP and SAS: Bank stress testing practices have room for improvement
Report shows financial industry progressing toward maturity, but gaps remain in technology
Banks and financial institutions globally are applying regulatory stress tests to their balance sheets to ensure they can withstand potential adverse market scenarios. But recent research shows that there are still significant differences across organizations.
Initially triggered by the global financial crisis of 2008, the case for stress testing has only intensified amid today’s financial market turbulence, from Greece to China. Financial institutions, however, recognize it’s not just about checking off regulatory boxes. They are increasingly aware that effective stress testing needs to inform strategic decisions.
According to a new report, Stress Testing: A View from the Trenches, the industry is progressing toward maturity in meeting increasing regulatory requirements. But gaps in areas such as technology and reporting limit further benefit. The research was conducted by the Global Association of Risk Professionals (GARP), the world’s leading professional association for risk professionals, and analytics leader SAS. Those surveyed were risk professionals representing commercial, retail and investment banks, asset managers and other financial institutions.
The report connects certain characteristics – close alignment with supervisory risk models, for example, and a willingness to act constructively based on results – with effective and mature operations. Even among those, however, there was widespread agreement that technology is not up to speed. Respondents rated their technology significantly below their organizations’ people or expertise. And eight of 10 called for more coordinated internal reporting related to stress testing.
“Financial institutions are dedicating significant resources to stress testing, and they’re seeing results in terms of responding to evolving requirements and generating useful results,” said Tom Kimner, Head of Global Operations for Risk Management at SAS. “But there is still work to do in streamlining technology and eliminating organizational silos that challenge seamless reporting.”
Respondents were almost evenly split between risk practitioners actively engaged in stress testing programs (53 percent) and senior executives managing these programs (47 percent). Those two groups differed in perceptions of their organization’s proficiency in stress testing. Among practitioners, for example, 62 percent rated their data management adequate or strong, versus only 49 percent of the managers. And while 63 percent of practitioners deemed scenario management adequate or strong, only 52 percent of managers agreed.
“We often hear from people in the trenches that management is wearing rose-colored glasses,” said Kimner. “But the survey results show the opposite – risk practitioners were often more positive than management.”
Another interesting finding was the variation among institutions in the time it takes to complete stress tests. While 22 percent took less than a week, nearly half took one to four weeks, and 25 percent needed up to eight weeks. When it comes to modeling, nearly half require more than six hours to execute a set of stress testing models. Just 10 percent said they can do it in less than an hour.
“Like so much of the post-crisis regulatory legacy, stress testing is complicated. It’s operationally demanding and will remain a work in progress for some time,” said Jeffrey Kutler, editor-in-chief at GARP. “This survey provides a snapshot of where the banks stand in 2015 and where they need to go.”
Given the effort and cost involved in stress testing, financial institutions want to use the results to formulate overall business strategy. While more can be done, the survey shows companies are beginning to make changes in many aspects of the businesses based on stress testing results. For example, 77 percent made some changes in their liquidity strategy, and an equal segment increased resources for risk control. Almost as many altered their risk appetite and risk limits. Stress test results are also affecting less obvious parts of the business, including 63 percent of respondents who cited changes in operational strategy and 59 percent who modified their competitive strategy.
Download the full Stress Testing: A View from the Trenches report to see detailed data from the industry on stress testing maturity from data management to modeling to reporting.
The Global Association of Risk Professionals (GARP) http://www.garp.org is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better-informed risk decisions. The GARP community represents over 150,000 risk management practitioners and researchers from banks, investment management firms, government agencies, academic institutions and corporations from more than 195 countries.
GARP’s mission is to educate, train and set global standards in financial and energy risk management. The association administers the Financial Risk Manager (FRM®) and Energy Risk Professional (ERP®) exams; certifications recognized and valued by risk professionals worldwide. GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels.
SAS is the leader in analytics. Through innovative analytics, business intelligence and data management software and services, SAS helps customers at more than 83,000 sites make better decisions faster. Since 1976, SAS has been giving customers around the world THE POWER TO KNOW®.