By Simon Goldsmith, Head of Risk Solutions, SAS UK & Ireland
The plans for tougher, more robust stress tests recently laid out by Mark Carney, Governor of the Bank of England, is a further sign that the Wild West days are over. The banking industry and regulators have tightened up the approach to risk, aiming to shift the financial system to one that ‘absorbs rather than amplifies shocks’. But meeting the new tests is proving ‘stressful’ for the banks themselves.
Every year it seems regulators increase their demands – with more complex scenarios, enhanced governance requirements and more scrutiny of results – leaving banks concerned that their current processes and systems are no longer fit for purpose.
This year’s tests take into account 120 market variables and assess the ability of large banks to withstand major external shocks such as a significant downturn in China, a contraction in the Eurozone and a fall in UK interest rates to zero. One bank I’ve been speaking with have created a million data segments for stress testing purposes alone.
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The problem facing many banks is making sure they have sufficient data quality systems in place to get sensible answers from all this data. Most established banks are not in a position to do a ‘rip and replace’ approach when it comes to their IT systems. Instead they need help to develop an iterative road map that can get them to where they need to be in the short-term, based on where they are now. Fundamentally, for the time being at least, it’s about compliance. Then they hope to be in a position to generate longer-term business value from having a clearer understanding of risk exposure right across the business, but this will require reviews and updates to the IT architecture over a period of years.
For now, banks need to be able to re-engineer and upgrade their stress testing processes to meet regulatory demands. Specific elements include:
- Enhanced capture and validation of finance and risk data into the stress testing process
- Establishing rigorous governance & control over data and models
- Accelerating analysis and validation of stress testing results using automated checks, workflow and visual analytics
With more data points, scenarios and considerations the 2015 stress tests will undoubtedly be more robust than before, which is why financial institutions are now beginning to use sophisticated model management factories, scenario testing engines and governance models to help them. It is now possible to reduce the manual effort required to appropriately inventory, manage, document, communicate, monitor change, and audit all of a bank’s models – as well as easily share information for effective top-down model risk reporting. And it’s possible to ease the burden of regulatory reporting in particular by using solutions that pre-populate regulatory documents from a single source data repository.