Enterprise-wide stress-testing product of the year
The Ermas Stress Testing module of Prometeia’s enterprise risk management solution enables banks to respond quickly to the evolution of business and investment strategies and market scenarios. Effective and robust stress testing must consider the intrinsic relationship between market, credit and liquidity risk factors to identify potential ‘spiral’ effects and evaluate possible mitigation actions. Therefore, a holistic view of the internal and external drivers affecting the balance sheet becomes a strategic necessity, rather than a pure regulatory requirement.
Ermas Stress Testing complements silo-based analyses of individual risk factors with an integrated and interactive forecasting tool, which enables institutions to model the interrelationship between market scenarios, new business strategies and credit risk parameters. With inbuilt simulation capabilities, users can evaluate their bank’s risks and returns under a variety of different scenarios, applying either market‑driven or bank‑specific stress assumptions.
Ermas Stress Testing supports the European Union-wide stress tests of the European Banking Authority (EBA), focusing on net interest income (NII) and credit risk templates. By combining macroeconomic scenarios, repricing and lending rate pass-through dynamics, credit parameters, output of relevant satellite models, and constant balance-sheet assumptions in an integrated stress-testing engine, the module ensures consistency of the projections of NII and credit risk metrics. It also automatically produces the required final reporting templates, and powerful drill-down capabilities enable users to explain results and obtain regulators’ validation.
Ermas Stress Testing offers high processing performance, including the option to use parallel database technology, and provides a customisable and user-friendly interface with an interactive reporting tool for real-time analysis and simulations.
Prometeia supports its software with extensive consulting services, implementation support and training for risk practitioners. The company collaborates with national and international supervisors to contribute to the development of regulations while gaining insight into upcoming requirements that it can pass on to clients.
Andrea Partesotti, director and head of enterprise risk management at Prometeia, says: “Prometeia is honoured to be awarded enterprise-wide stress-testing product of the year in the 2018 Risk Technology Awards – an acknowledgement of the significant investment and advances we have made in providing our clients with a sound technological framework for integrated balance-sheet management. Our solutions reflect our active involvement with regulators and key industry influencers, as well as our dedication to continually evolve in line with technological and functional requirements. Our latest release of the credit risk module that is fully compliant with the latest EBA/European Central Bank guidance on the 2018 EU-wide stress tests is yet another example of our expertise and proven ability to provide risk managers with the necessary tools for advanced analytics and effective compliance.”
“Good and extensive coverage”
“Strong enterprise focus and execution. Rich functionality and data, and good technology”
“Product is backed up by impressive econometricians and risk management and professional services”
With years of experience helping firms assess their resilience by integrating data and risk factors across departments, the winner of this year’s best enterprise‑wide stress‑testing product award was Prometeia. Andrea Partesotti, director and head of enterprise risk management, explains the importance of integrating credit and interest rate risk and streamlining stress testing
What makes Prometeia stand out in the stress-testing industry?
Andrea Partesotti: Prometeia’s solid experience in the stress-testing market and continued ability to help firms meet regulatory and internal requirements make our offerings stand out in a competitive marketplace, although it’s always a positive surprise to win such a prestigious award. When the European Banking Authority (EBA) assessed the resilience of European banks in 2014, Prometeia supported its clients through the stress‑testing process, and it was the same for European Union-wide stress testing in 2016 and its support continues today. After undertaking these processes with clients and continuously enhancing the solution, the result is an excellent stress‑testing simulation engine that can be used for regulatory and managerial exercises.
What is your view on tailoring solutions to meet local regulatory requirements? Do you believe stress‑testing offerings should be designed to be explicitly compliant with local regulations?
Andrea Partesotti: Stress testing has become a hot topic on the agendas of chief risk officers (CROs) since the US Federal Reserve and the EBA included heavy stress‑testing exercises in their periodical supervisory requirements. For firms to comply with these requirements, there is a definite need for tailored solutions.
Prometeia has built a balance‑sheet simulation engine to support CROs and chief financial officers (CFOs), and even before the EBA introduced its European‑wide stress-testing plans in 2014, we had already undertaken a significant part of the work. When the EBA published the framework for regulatory stress tests in 2014, Prometeia needed to further improve its solution to help customers run the simulations according to the EBA framework (scenarios, rules and constraints on changes in the variables, templates, and so on).
This way, with the help of Prometeia, customers have been able to reduce manual intervention and automate the data entry part of the process (in effect, by filling in output templates according to the complex rules and formats defined by the regulator). What used to be perfomed manually can now be fully automated, which allows users to focus their resources on performing quality checks and reviewing what needs to be done from a financial perspective instead.
What are the key ingredients of a stress‑test solution aligned with industry best practices?
Andrea Partesotti: The key word is integration. Silo-based processes can hinder effective risk management, and it is essential for firms to move towards a single workflow and operating environment. With a harmonised operating model, firms are better suited to succeed with stress testing, as they will have the right foundation for managing the different macroeconomic scenarios with which stress testing starts, and satellite models that link macroeconomic variables to the risk factors affecting profit and loss and/or the capital requirements of the bank.
The final vital ingredient is the ability for firms to manage the impact of credit events on their net interest income and, at the same time, the one of interest rates on credit exposures – such as probabilities of default. An integrated balance‑sheet simulation platform that simultaneously and consistently manages credit risk, interest rate risk in the banking book (IRRBB) and liquidity risk is essential. This is risk integration.
Considering Prometeia’s background in asset-liability management (ALM) and liquidity risk solutions, how do you see ALM platforms as a starting point for developing a consistent framework for enterprise stress testing?
Andrea Partesotti: Early‑stage ALM and liquidity risk management tools, which were focused solely on financial risks, are probably not the right starting point for enterprise stress testing. More advanced ALM systems can be a different story.
Credit risk plays an important role in addition to IRRBB and liquidity risk, and systems that combine these risk factors can offer firms a good starting point for stress testing.
For many years, customers have requested that Prometeia integrates credit risk into its ALM system; this is why, as the 2014 EU-wide stress test was launched, Prometeia has established itself as best-placed system to run the exercise.
Around 70–80% of the necessary functionalities required for stress testing were already in place. Prometeia only had to focus on the remaining 20–30% of customisations to meet the EBA regulatory stress‑test requirements.
This second generation of ALM systems, integrating interest rate and credit risk, represents a strong foundation for enterprise stress testing.
What can customers expect from Prometeia going forward?
Andrea Partesotti: As banks continue to work on the CFO and CRO simulation engines and collaboration model, Prometeia’s focus will remain on workflow automation to give firms more time to look at the results of the stress testing as opposed to producing the numbers. Firms are increasingly looking to establish a unified environment where inputs and outputs are shared between CFOs and CROs, and Prometeia’s role will be to support customers in this transition, ensuring its systems can continue to minimise the need for manual intervention and help firms build robust and efficient processes for the future.