Lee Thorpe, Business Solutions Manager (Risk) at SAS UK and Ireland:

“Stress testing is always an all-consuming activity for the banking community. The scenarios that banks face as part of annual stress testing exercises are becoming more exploratory which means the variety and complexity of modelling is increasing.

“A substantial change in approach to identify risks in the business model may require an alternative methodology, further challenging banks to deliver in tight timeframes. If a different approach is needed – implementing an updated process with additional models in a governed and controlled process – it will be challenging without an agile and high performance centralised system.

“Compliance with the new requirements needs to bring a bank up to the highest governance standards to reduce risk, but still enable controlled enhancements to the process and models. Complicated statistical models are difficult to implement when scenarios containing different primary risk drivers are provided. Model risk management must clearly demonstrate how a bank has identified and created all its critical models (which might number 2,000 or more) and how they will be appropriately applied in accordance with the guidelines.

“The key is to have an agile, high performance environment with an associated model repository of interchangeable validated models. This ensures that entire portfolios are receiving appropriate models sensitive to the key risk drivers that have been through validation and review. A centralised top-down approach will not only allow banks to remain flexible to changing risk policies and regulations; it can effectively track model issues, challenges and remediation across the business whilst allowing time for controlled changes to the process.

“The real value here is the ability to be proactive and receive systematic reporting from a centralised execution engine and model risk management system. This keeps management and regulators comfortable but helps manage banks’ future health and robustness. Stress testing is set to become even more complicated with the inclusion of IFRS9 forecasting from next year, but the new model risk guidance means banks are better placed to gain valuable insight into capital adequacy and portfolio risk management.”