Stress-testing – Special report 2019

The surge of supervisory stress-testing that began after the 2007–08 financial crisis had a clear purpose: to identify banks in danger of imminent distress and reassure the market that those still standing were solvent and could survive the downturn.

More than a decade later, issuance costs for bank debt could hardly be lower – even for subordinated bonds. That suggests a level of confidence among investors that they understand the risks in the banking sector. However, bankers say the data demands from regulatory stress-testing are, if anything, becoming more intense

Increasingly, regulators seem to see the stress-testing exercise more as a way to identify process failures rather than balance sheet risks. And banks see them as a capital constraint that is misaligned with the Basel risk-based ratios, or even just as an extra layer of bureaucracy. The annual round of regulatory stress-test results is in danger of becoming an expensive circus that doesn’t specifically reduce risk in the system – especially if, as uncovered recently, banks are gaming the results. 

If the concern is that banks are modelling and assessing risk incorrectly, then perhaps a more valuable use of supervisors’ time and resources would be to deploy their challenger models directly to the Basel framework. The Fed already does this for stress-test outputs. Regulators can then step up scrutiny of those banks with model outputs that deviate a long way from the challenger, rather than imposing a stress test for all risks on all banks. 

Download the full 2019 Stress-testing special report in PDF format

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Banks seek new value for their efforts

As regulatory stress tests evolve and a new age of stress-testing approaches, firms are looking to maximise value by making the most of scenario-based analytics. John Voigt, principal solutions manager at SAS, explores the importance to institutions of…

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