Introduction

Stress based risk management has emerged as one of the foremost priorities for the financial services industry. Having consulted a number of financial institutions, the vast majority cited stress testing as the pivotal objective around which future initiatives will evolve. To this end, banks are heavily focused on implementing more robust and comprehensive infrastructure to facilitate more timely and meaningful results. To meet this objective, institutions must overcome significant challenges owing to the monumental volumes of data involved, varying portfolios across businesses and multiple data sources.

Key findings

• Stress Testing Methodology – The global credit crisis has revealed the dangers of assessing risks independently of one another and taking a siloed approach to risk management. With these dangers highlighted, regulators have encouraged financial institutions to adopt a more enterprise-wide regime, allowing risk managers to understand and model the impact of shocks and stresses on the institution as a whole.

• Regulation – Regulators continue to address the inadequacies of existing stress testing frameworks and are establishing criteria for evaluating future practices. Stress testing is therefore becoming an increasingly critical component of a bank’s risk management framework. The regulatory incentive is therefore bound to become more pressing as banks weigh their re-evaluated and proposed approaches against the new criteria.

• Infrastructure and Technology – The systems that support underlying processes and methodologies are absolutely integral to coping with both the speed and scale of the business that is being executed. In order for banks to include stress testing results as part of their decision making process they need to be accurate and presented to the decision makers in a clear and timely manner. Such sophisticated solutions, with more contemporary functionality will allow forerunners to gain a distinct competitive advantage over their peers.

• Future Initiatives – With significant expenditure planned for the coming year and a host of issues to address their order of prioritisation should dictate the success with which banks meet regulatory expectations and derive tangible benefits at the same time. Technology upgrades should ideally take prominence alongside efforts to integrate various types of risk in the short term, with infrastructure consolidation following thereafter.  

Conclusion

Considerable increases in budgets, the vigour of regulation, clear identification of shortcomings and priorities, and renewed interest by senior management have patently escalated stress testing to immediacy. An enterprise-wide view of risk management is increasingly being valued, with integration of various risk types being identified as a major challenge. This should be achieved more seamlessly with greater consolidation of the IT infrastructure and advancing to software that places this objective as its integral focus.

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Tagged with: 2010, Executive Summary, quarterly research report, risk management, stress testing