WEF backs calls for reverse stress tests

"Glaring gaps in risk management" represent one of the biggest dangers facing the world in 2009, and financial institutions must improve their modelling and testing as a matter of urgency, according to a World Economic Forum report launched today.

Speaking at the launch in London, Oliver Wyman chief executive John Drzik, who helped write the report, said: "There needs to be a focus on risks which can kill the organisation. Several organisations have already set up "black swan committees" to focus on these."

Reverse stress tests, which start by outlining an outcome that would threaten the company and go on to determine what scenario would produce such an outcome, have been recommended by regulators including the UK Financial Services Authority.

Drzik echoed criticisms from several regulators that risk management had been treated as a side issue rather than one deserving of constant management attention. Also, "model builders tend to focus on areas where there is a large amount of historical data, which means they underfocus on low-frequency high-impact risks... There's not enough emphasis on stress testing and quantitative models".

See also: Asset price crashes could continue this year, says World Economic Forum
Stress tests were ignored in lead-up to crisis, Basel risk head says
BIS releases roadmap to better stress testing
FSA plans reverse stress tests

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