RiskTech Forum

Wolters Kluwer: Stress Testing: Putting The Pieces Together To Solve An Increasingly Intricate Puzzle

Posted: 1 December 2015  |  Source: Wolters Kluwer

There is nothing like a near-death experience to foster a desire to live a healthier, safer, more disciplined life – if not by the patient, then by the patient’s doctor on his behalf. The changes in stress-testing practices demonstrate that this also applies in financial services. Tests are conducted more often nowadays – some firms may wonder if they ever stop – and the exercises are far more comprehensive. And in case there is a temptation for supervisors or institutions to backslide or let their guard down, recent events in Europe should nip that in the bud and keep rigorous testing a top priority.

Bankers must make greater efforts to gather and report data and sharpen their criticalthinking skills, too, as supervisors shift from static testing models to dynamic ones with a number of continually interacting inputs and on-the-fly evaluations. There is heightened emphasis on analyzing and explaining decisions, not just making them. Like students sitting a math exam, managers have to show their work – not just the right answers but how they got them. In the new environment, supervisors are assessing not just how much strain banks can take, but how much bankers can take.

Stress testing is not being carried out in isolation, either. Stress scenarios must be incorporated into everyday practices related to liquidity monitoring, capital adequacy and risk analysis and management. Testing is a prominent feature of many regulatory rubrics, from Basel III to IFRS 9 Financial Instruments, the new International Accounting Standards Board system intended to account for impairments, to the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States.

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