RiskTech Forum

Chartis: Stress testing: Why it should always be in your thoughts

Posted: 9 November 2017  |  Author: Stanley James  |  Source: Chartis


Stress testing is never far from the thoughts of Financial Institutions (FIs), but recent developments will have pushed it front of mind again. In June 2017, the results of the Comprehensive Capital Analysis and Review (CCAR) were announced, and the deadline for submitting data to the Bank of England’s (BoE’s) 2017 stress testing program for this year has been reached. The next batch of Dodd-Frank Act Stress Tests (DFAST) is also approaching. Each affects FIs’ operations in different ways.

To many FIs, stress testing must seem like a never-ending chore – a cycle of activity and rest: tests, reporting, waiting for the results and then doing it all over again. FIs also face more complex and detailed demands. For the first time, for example, the 2017 BoE stress test includes two stress scenarios and an additional exploratory scenario, as well as the test’s regular annual cyclical scenario. It must be tempting for many FIs simply to forget about stress testing during those seemingly brief periods when it has moved down the list of their priorities. Until the results come out again, that is, when FIs then get busy once more: either attempting to capitalize on their results, or looking at how they can improve them in the next test. 

Hardly surprising, then, that in many FIs – particularly small and medium-sized ones – stress testing can be largely a box-ticking exercise. But it needn’t be, nor should it be. Stress testing should definitely and constantly be top of mind in FIs – but not because they have to do it. Rather, they should be thinking of stress testing as a way to optimize their operating costs and mobilize their capital. By incorporating a strategic stress testing solution into their ‘business as usual’ operations – one that’s geared towards general decision making and control of the organization’s risk appetite, rather than being a compliance engine – FIs can capitalize on the knowledge and analysis gained during the stress testing process itself. 

This won’t be easy for everyone. Dealing with the variations in stress testing can be a challenge for unprepared FIs with only piecemeal solutions in place. By contrast, FIs with a fully adaptive and prepared system can thrive, and demonstrate their processes as well as their capital adequacy.

Several FIs are already using their stress testing systems for internal assessment, and to help analyze their trading and lending behaviors. They can use the knowledge and analysis gained from these tests to reduce their operating costs, increase the efficiency of their business, and ensure they can protect and maximize their profits. Looking ahead, systems like this will be seen as vital for any FI wishing to operate effectively.

So it’s time for FIs to modify their attitude – stress testing may be always in their thoughts, but the tenor of those thoughts needs to change.

For more information on solutions for stress testing, see the Chartis Research report Enterprise Stress Testing Solutions, available via www.chartis-research.com