RiskTech Forum

SAS: Stressed Out – How US and European Banks are Responding to Regulatory Stress Tests

Posted: 3 July 2017  |  Source: SAS


For many financial service institutions in the US and Europe, stress testing is now a fact of life as regulators seek to avoid any repeat of the 2008-09 financial crisis. Since the US Federal Reserve introduced the Comprehensive Capital Analysis and Review (CCAR) process in 2010, supervisory expectations for all aspects of capital requirements have been significantly heightened for the largest and most complex US banks with assets of US$50 billion or more.

In its CCAR 2013 review document1, the Fed cited current practices by bank holding companies and outlined best and practices. Additionally in 2013, a complementary exercise – the Dodd-Frank Act stress testing (DFAST) – was initiated to provide a forward-looking review of capital adequacy for banks with $10 billion or more in assets. In Europe, the picture is similar, with the European Banking Authority overseeing an EU-wide stress test exercise that has run annually since 2009 and covers at least 50 percent of each national banking sector – spanning 124 banks in 2014.2 In the UK, the Bank of England is running an extended variation of the EU stress tests.3

As regulators refine and improve their approach and methodologies, banks must now respond to more stringent compliance requirements for creating sound and robust capital plans and adhering to stress testing mandates.

The impact of these stress tests, in combination with a swathe of other financial services regulations already in place or being implemented, is significant. Most obviously, it is adding a major resource burden. By the end of 2014, Citigroup expects to have nearly 30,000 employees working on regulatory and compliance issues, up 33 percent since the end of 2011, while JPMorgan Chase is expanding its risk control staff by 30 percent.4 In Europe, Deutsche Bank is doubling its compliance spending and adding at least 500 additional resources.In 2013, HSBC announced plans to add approximately 3,000 compliance staff.6 As many banks are now realizing, meeting stress testing compliance obligations is now a requirement to remain in business.

In this context, SAS and Longitude Research conducted an in-depth survey of more than 100 senior banking officials in both Europe and the US to assess how the rise of stress testing is affecting their organizations. We reviewed where investment is being focused, what the key priorities are with regards to stress testing, and how this is changing the oversight and management of these institutions. Following is a brief overview of key findings.

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