The aftermath of the 2008 financial crisis saw regulators across the globe coming up with stress testing guidelines for their respective regions.In the US, the stress testing program which is managed by the US Federal reserve initially started in 2009 as SCAP (Supervisory Capital Assessment Program) and has matured into CCAR (Comprehensive Capital Analysis and Review) expanding coverage to 38 US Banks including 5 Foreign Banks with large US operations. In the European region the stress testing guidelines are managed by the EBA (European Banking Association) and impacts close to 100+ Banks, while in the UK the stress testing guidelines come under the purview of PRA (Prudential Regulatory Authority) impacting close to 7 large UK banks.
The complexity of the stress testing program varies across regions for different regulators in terms of data requirements, modeling methodologies, regulatory scenarios, and granularity of submissions. However, aspects like Application Architecture, Governance, Model Management, Reporting and Data Management provide a great opportunity for global banks to leverage on the commonalities, which can make stress-testing compliance more efficient and work in an integrated manner across the different regions.
Furthermore, an integrated approach also helps global banks to reduce overall infrastructure costs and enable them to create a robust and a scalable stress-testing framework with better controls, quality and eventually enabling them to achieve better returns on their investments.Depicted in the chart below are the key components typical stress testing programs globally involve and components that can be potentially explored by global banks for achieving an Integrated Stress Testing approach.
- Data Governance &Management – Granularity of data submissions may vary across stress testing regimes in different jurisdictions but aspects around data governance and data management are also reviewed in these submissions in varying degrees. Regulators usually insist on establishing data governance policies,adequate controls around data movement, ensuring data quality, data dictionaries, establishing data lineage and maintaining the business and technical metadata. Most global banks invest in multiple 3rd party tools which can effectively be cross-leveraged at an enterprise level to ensure standardization of processes along with the necessary quality and integrity of the data. This can also help banks move towards a target state of risk and finance alignment at a faster pace.
- Model and Scenario Management – Regulators provide the stress testing scenarios to the participating banks in their region based on the factors relevant for the region. Maintaining scenario libraries at an enterprise level can also help global banks to extend, leverage and enhance their existing idiosyncratic scenarios for specific regions. Model management platforms and technology can also be cross-leveraged for stress testing requirements. Areas such as model lifecycle management, model hosting, and model documentation management are good candidates which can be maintained at an enterprise level. Many global banks are also exploring an idea of standard unified data model view specifically to cater to modeling requirements across regions.
- Stress Testing Regulatory Submissions–Inthe US, CCAR requires participating banks to submit close to 90+ reports, EU regime has close to 36+ reports and the UK regime requires close to 16+ reports from participating banks at varying frequencies. The reporting involved is very granular and many global banks usually rely on third-party solutions to manage the reporting expectations.Enterprise-wide reporting solutions can help the bank to not only leverage the solutions for cross-border stress testing reporting requirements but can also look at moving other regulatory reporting requirements like Basel, liquidity risk management etc. which will also provide more cost efficiencies on the reporting front.
Other components of Cross-Border Leverage
- Forecasted Variables –Banks use a number of variables in their stress testing process and the regulators specific to each geography only publish the forecasted value of select variables leaving the banks to forecast the remaining variables by themselves. Banks can cross leverage some of the variables across geographies. For e.g.: Stress Forecast of US GDP rates are published by Fed and if there are a few models which consider US GDP rate in their propriety models in their stress testing regime, then they can use the US stress testing forecasted variables without having to forecast it by themselves.
- Controls – Stress testing programs across various geographies are at different levels of maturity and currently many regulators are focusing more on only the quantitative aspects as against the qualitative aspects as well as barring the US geography. Banks can leverage the business, technology and data controls established across the stress testing programs as part of their qualitative assessment process in one geography over to the other Regulatory regimes.
As the stress testing mandates across regions have more or less stabilized, Global Banks are looking at more and more opportunities to simplify, centralize and automate most of the processes involved in stress testing area to gain better efficiencies and controls. An integrated approach or framework could enable global banks to bring in greater efficiency in terms of cost and time to market but also bring in greater depth and consistency in their risk management and capital planning processes
About the Authors
Ajay Katara is a Domain Consultant with the Risk Management practice of the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). He currently leads the BFS Risk Practice’s portfolio on Regulations and Robotics Process Automation. He has extensive experience of more than 13 years in Consulting & Solution design space cutting across CCAR Consulting, AML, Basel II implementation, and credit risk, and has worked with several financial enterprises across geographies. He has significantly contributed to the conceptualization of strategic offerings in the risk management space and has been instrumental in successfully driving various consulting engagements. He has also authored many editorials, details of which can be found in his linked in profile (https://www.linkedin.com/in/ajaykatara/)
Manoj Reddy is the Head of BFS Risk & Compliance Practice for TCS North America with an experience of more than 15 years in the areas of financial services, IT, and business consulting. Reddy has lead several risk consulting and implementation engagements for financial firms globally. He has provided both Regulatory and Strategic Business solution to his customers over the last decade primarily in the area of CCAR, Basel, Liquidity Risk, and Enterprise Risk management and is currently leading TCS efforts in North America with respect to providing cognitive solutions for Risk & Regulatory problems.
A quarter of banking customers noted an improvement in customer service over lockdown, research shows
SAS research reveals that banks offered an improved customer experience during lockdown
This represents some good news for banks in an extremely challenging time, with 59% of customers also saying they’d pay more to buy or use products and services from any company that provided them with a good customer experience over lockdown.
The improvement in customer experience also coincides with a rise in the number of digital customers. Since the pandemic started, the number of banking customers using a digital service or app has grown by 11%, adding to an existing 58% who were already digital customers. Over half (53%) of new users plan to continue using these digital services permanently moving forward.
Brian Holden, Director, Financial Services at SAS UK & Ireland, said:
“It’s notable that in times of need customers value being able to communicate with their bank and place an even higher value on good customer service. A rise in the number of digital customers means banks can now reach a wider audience online, leveraging AI and analytics to offer a more personalised experience.
“There is work to be done, though. Even greater personalisation is needed if banks are to win over the 12% of customers who felt banking services deteriorated over lockdown. And this personalisation will need to get right down to a segment of one to properly reflect the unique circumstances some individuals now find themselves in due to the pandemic.”
While the number of digital users grew over lockdown, there is still a quarter (24%) of the banking customer base that have chosen not to make the switch to digital services.
Meanwhile, failure to offer a consistently satisfactory customer experience could prove costly for banks, with a third (33%) of customers claiming that they would ditch a company after just one poor experience. This number jumps to 90% for between one and five poor examples of customer service, so this just underlines how much retail banks can win or lose in these difficult times.
For more insight into how other industries across EMEA performed during lockdown, download the full report: Experience 2030: Has COVID-19 created a new kind of customer?
Swedish Bank Stress Tests in Line with Recent Rating Actions
The Swedish Financial Supervisory Authority’s (FSA) latest stress test results show major Swedish banks’ robust ability to absorb credit losses. The results support Fitch Ratings’ view that short-term risks have abated in recent months, and are in line with Fitch’s assessment of major Swedish banks’ capitalisation at ‘aa-‘, which was a factor when Fitch removed the ratings of Handelsbanken, Nordea (not covered by the FSA’s stress test) and SEB from Rating Watch Negative in September.
The FSA estimated about SEK130 billion of credit losses over 2020-2022 for the three largest banks (Swedbank, Handelsbanken and SEB) under its stress test. This represents about 220bp of their loans, or about 70bp annually. However, the banks’ pre-impairment profitability in the stress test could absorb credit losses of up to about 110bp of loans annually. Fitch’s baseline expectation is for credit losses below 20bp of loans in 2020 and 8bp-12bp in 2021.
Capital remained strong under the stress test. The average common equity Tier 1 (CET1) ratio fell by only 2.8pp (1.9pp if banks did not pay dividends) from 17.6% at end-June 2020. The capital decline was not driven by credit losses, which could be absorbed by pre-impairment profitability, but by risk-weighted asset inflation.
The three banks’ 3Q20 results showed that capital has been resilient despite the coronavirus crisis. The banks had a CET1 capital surplus over regulatory minimums, including buffers, of almost SEK100 billion (excluding about SEK33 billion earmarked for dividends). SEB had a CET1 ratio of 19.4% at end-September, Handelsbanken’s was 17.8% and Swedbank’s 16.8%.
The SEK130 billion credit losses under the latest stress test are lower than under the FSA’s spring 2020 stress test (SEK145 billion), which also covered a shorter period of two years. However, they are still larger than the actual losses incurred by the three banks during the 2008-2010 crisis. This is despite tightened underwriting standards by the three banks in recent years, including, in the case of SEB and Swedbank, in the Baltics, the source of most of their loan impairment charges in the previous crisis.
In its baseline economic forecasts, the FSA assumes a harsher shock to Sweden’s GDP in 2020 and 2021 (-6.9% and 1%, respectively) than Fitch’s baseline (-4% and 3.4%), although it assumes a similar recovery by end-2022. It also assumes real estate price corrections, which appears particularly conservative in light of a 11% housing property price increase over January to November 2020.
The ratings of Handelsbanken (AA), Nordea (AA-) and SEB (AA-) are on Negative Outlook due to medium-term risks to our baseline scenario. The rating of Swedbank (A+) is on Stable Outlook, reflecting significant headroom at the current rating level following a one-notch downgrade in April due to shortcomings in anti-money laundering risk controls.
Future success for banks will be driven by balancing physical and digital services
Digital acceleration due to COVID-19 has not eliminated the need for bank branches
Faster service (23%), smaller queues (26%) and longer opening hours (31%) are among customers’ biggest asks of their bank branch, new research from Diebold Nixdorf today reveals. But with 41% consumers saying they would be comfortable to engage with all banking services via an app, it is vital that banks respond to the full spectrum of customer needs – balancing and evolving their offerings on multiple fronts.
A third (35%) of customers say they will always want access to physical, in-branch banking services in some capacity and one in ten (10%) consumers will never bank predominantly online in the future. This demonstrates that there remains an important role for the services a branch provides. This role, however, continues to shift away from purely transactional banking:
A quarter (26%) value face-to-face advice when it comes to their banking needs
One in five (18%) seek advice on different products
17% want to speak to the staff or other customers.
Matt Phillips, Diebold Nixdorf vice president, head of financial services UK & Ireland, said: “The majority of banks have spent the last decade focusing on their digital strategies and investing in improving – or establishing – their online customer experience. However, the data shows that there is still an essential role for physical branches. Banks now increasingly face the challenge of continuing to provide customers with access to a range of physical and as well as digital services, giving them the flexibility to choose the best service for them at any given moment in time.”
When looking beyond the impact of COVID-19, planned branch visits by customers are expected to rebound to 28%, following a dip to 11% during lockdown. And when asked about the new services they’d like to see inside their bank, sixteen percent of respondents said more self-service machines would improve their in-branch experience.
Matt Phillips continues: “In a world that is fast evolving and where the future is digital, there’s no doubt that high street banks must, and are, responding to the needs of highly digital customers. But not every customer requirement is digital. There is still a strong need for physical bank branches and the interaction and services they offer, and striking this balance between physical and digital is where the industry must come together to provide solutions. For example, building a strong, leave-behind strategy is something we’re seeing across the board when banks have to close branches, ensuring customers have access to self-service machines to complete all their transactional needs.”
The Coming AI Revolution
By H.P Bunaes, CEO and founder of AI Powered Banking. There is a revolution in AI coming and it’s going...
Q&A with Joe Steele, Head of Workplace Technology at Starling Bank
In just under a year, many businesses had no choice but to go online and with digital transformation on the rise...
How financial services organisations are using data to underpin future growth
By John O’Keeffe, Director of Looker EMEA at Google Cloud In addition to the turmoil caused by the COVID-19 pandemic, a...
Three questions the financial services industry must answer in 2021
Xformative, a Mastercard Start Path recipient, shares what these questions mean for fintech partners and their innovations This year, fintechs...
A quarter of banking customers noted an improvement in customer service over lockdown, research shows
SAS research reveals that banks offered an improved customer experience during lockdown A quarter (27%) of banking customers noted an...
Is Digital Transformation the Key to Business Survival in the New World?
After a turbulent year, enterprises are returning to the prospect of a new world following an unprecedented pandemic. Around the...
Virtual communications: How to handle difficult workplace conversations online
Have potentially difficult conversation at work, like discussing a pay rise, explaining deadline delays or going through performance reviews are...
Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna
Payment processor Mollie reveals the most popular payment methods for Black Friday Mollie, one of the fastest-growing payment service providers,...
Brand guidelines: the antidote to your business’ identity crisis
By Andrew Johnson, Creative Director and Co-Founder. How well do you really know your business? Do you know which derivative of your...
COVID-19 creates long and winding road for startups seeking investment
By Jayne Chan, Head of StartmeupHK, Invest Hong Kong Countless technology and other companies describe themselves as innovators, disruptors or...