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Banks seek new value for their efforts

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 setting a clear goal, and employing the appropriate technology and resources to successfully navigate this transformation

John Voigt, SAS
John Voigt, SAS

The 2007–08 financial crisis ushered in stress-testing as a key component of bank supervision, and the changes brought by these regulatory exercises have been overwhelmingly positive. Along with delivering on their immediate goal to stabilise the financial system through increased capitalisation and greater transparency, regulatory stress tests have also led to great improvements in the risk management processes at participating financial institutions. Banks of all sizes have dramatically enhanced the utility of their portfolio data, strengthened process governance and improved their ability to make better data-driven decisions. 

However, banks often constructed stress-testing programmes with a single focus – compliance – and necessarily made tactical implementation decisions to meet critical near-term deadlines. As a result, many banks still struggle to use their stress-test programmes for any strategic purpose. Despite their ambitions, they find that the systems and processes in place present several limitations that challenge broader usage: 

  • Disparate and fragmented systems – leading to inflexible processes, inconsistent data and incoherent results
  • Inefficient workstreams with an overreliance on manual subprocesses – creating bottlenecks and key-person dependencies
  • Underpowered modelling capabilities – which introduces long processing lags and limits data granularity
  • Disconnected control processes – strained by a fast-paced, iterative environment.


Transforming stress-testing

Despite these challenges, we are on the cusp of a new age of stress-testing. Leading banks recognise the lost potential of their stress-test programmes and are taking action. A convergence of factors is accelerating this transformation.  

First, regulatory stress tests still require significant time and effort to complete, and resource availability is increasingly constrained. A successful programme relies on a broad blend of analytical skills, creativity and business judgement, and acquiring and retaining such high-performing talent is paramount. 

However, current stress-testing roles are often focused on maintaining the status quo under high pressure and tight deadlines. This has led to employee frustration, burnout and high turnover, creating a vicious cycle that can jeopardise the sustainability of the programme.

Second, changes to loss accounting rules under International Financial Reporting Standard 9 and Current Expected Credit Loss are spurring major implementation efforts at institutions, and this is providing synergistic opportunities with stress-testing. To meet the standards, banks are broadening their collection of detailed performance data, and they recognise this data could enhance their stress tests as well. 

A new era of scenario-based analytics has begun. But, to complete this evolution, institutions must proceed with a clear goal, along with the right technology and resources
John Voigt, SAS

Also, as with stress-testing, these new accounting standards are scenario-driven, so there is a desire to establish a scenario management infrastructure that can accommodate both in a cohesive manner. And, since financial accounting processes are repeated much more frequently and on highly compressed schedules, the new standards are spurring interest in higher-performance solutions with greater automation. As banks investigate solutions and are exposed to the capabilities they offer, they are eager to apply these benefits to stress-testing.


A modern solution

A modern enterprise stress-testing solution can provide capabilities generally lacking in today’s regulatory-focused solutions, but necessary for scenario-based risk management:

  • Greatly enhanced scenario support – effectively manages supervisory scenarios and the expanded number of scenarios needed for strategic analysis
  • Unified data architecture supporting the principles of the Basel Committee on Banking Supervision’s standard 239 – ensures coherence across the enterprise. Integrated data cleansing and reconciliation processes ensure data robustness is understood
  • Streamlined, transparent workflows – breaks down the functional silos and eliminates unnecessary and redundant tasks, and ensures the process is consistent and repeatable while reducing key person risks
  • Highly accelerated processing and throughput – supports a highly iterative analysis over a wider range of scenarios and assumptions
  • Flexible visualisation and reporting – automates reporting with ad hoc analysis and custom drill-down capabilities, and easily summarises data across multiple dimensions
  • Embedded, highly automated governance and control framework – eliminates approval bottlenecks and establishes an auditable record of the entire process.


Partnering for success

The evolution towards a modern stress-test environment is not a trivial undertaking, and many institutions are unable to dedicate adequate resources to the task. To overcome this, banks are increasingly turning to technology and advisory firms for solutions. By working with a proven partner, banks can accelerate their transition and benefit in a number of ways, including access to:

  • Industry best practices and acquired experience to refine a vision into an obtainable goal
  • Structured implementation plans to reduce the risk of delays or overruns
  • Experienced personnel with specialised skill sets
  • Proven solutions using advanced technologies, such as massively parallel processing, cloud-based analytics and machine learning
  • Ongoing software updates for maintenance and enhanced functionalities
  • Regularly maintained support documentation and training opportunities.

A new era of scenario-based analytics has begun. But, to complete this evolution, institutions must proceed with a clear goal, along with the right technology and resources. Successful institutions can move beyond simple compliance and achieve improved financial performance through tighter alignment of loss accounting, stress-testing and balance sheet management.


Stress-testing – Special report 2019
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