Stress testing: Turning an obligation into an opportunity
For many, the most recent Bank of England (BoE) stress test results must have provided a sense of relief with all seven participating banks and building societies clearing hurdles, coupled with recognition of the improvements made to stress testing frameworks.
Challenges can be mitigated through greater automation and enhanced data management.
That said, expectations remain for further improvement, notably in extending enhancements to internal stress testing procedures, further investment in underlying infrastructure and strengthening of model risk management – observations that echo earlier feedback provided throughout 2019 for example in relation to IFRS 9, BCBS239 and regulatory returns.
Firms best able to use the adoption of regulatory change as a catalyst for broader capability enhancement will be the winners in gaining strategic advantage from better understanding and control of underlying data, greater efficiency of operational processes, a more informed view of the customer and as a result, increased resilience and profitability.
Building a well-oiled machine
To build an accurate picture of financial health, a bank needs the capability to carry out tests frequently and efficiently – yet costs and time are material challenges. Stress-testing requires a significant amount of data, both internal and external to be brought together, often from highly disparate and fragmented environments.
Large numbers of staff are involved, and much time is spent between various handovers and iterations. Many of the data processes are performed manually, and their repetitive nature leaves the door open to human error.
These challenges can be mitigated through greater automation and enhanced data management. Analytics platforms that replace the processes for data staging, modelling, and reporting workflows allow the assessment of an increasing number of scenarios, at an ever-faster rate. Most importantly, they enable staff to focus on results and business decisions rather than practices. This creates a streamlined process and allows for a deeper, more impactful analysis.
Furthermore, for stress testing to be effectively embedded into business processes, there must be strong collaboration between risk, finance and business functions, however all too often we see these working in silos.
An integrated risk and finance platform can help to break down these silos. Consider an intuitive solution that helps staff orchestrate the entire stress testing process from a common platform; a platform that integrates the activities of the various functions, fostering collaboration between the departments, enabling superior business decisions and resulting in a more robust, resilient banking operation.
The benefits of continuous compliance
Implementing a rigorous regime of internal stress tests is easier said than done. Yet there are real upsides to taking control of your operational processes and gaining a better understanding of the data behind them.
Strengthening the underlying stress testing framework will translate into a more rounded view of risk in your business and what drives profitability. By streamlining data management, you will drive real operational efficiency, make better decisions, based on better insight, in less time and at lower cost.
Making scenario-based analysis easier to perform allows it to become embedded in business as usual, enabling analysis of a wider range of stress scenarios and in greater detail. As a result, the bank will have a better understanding of its customers, how they react under a stress scenario and how the bank can increase its resilience to financial shocks.
By Miles Elliott, head of risk, SAS UK & Ireland
