During the intensive research for Stress Testing Europe, the Centre for Financial Professionals gained an insight from thought leading industry professionals across Europe as to the top challenges on risk professionals’ minds within the Stress Testing space.
The findings of the research revealed increasing demands among industry professionals, with standards progressively rising, regulators becoming more stringent in their stress testing process and results. After the EBA Stress Tests were being postponed until 2016, and the Bank of England submission dates looming, Stress Testing is the key focus across risk management in Europe.
As is to be expected from a regulatory driven exercise, the challenges of reporting, submitting and complying to regulatory expectations and requirements were high on the agenda across the board. A key area of focus more so for 2016 was submitting under multiple jurisdictions and understanding the differing requirements across global regulators. Many voiced a strong need for global standardisation amongst regulators when conducting stress tests, with a key focus on a move towards US CCAR/DFAST processes and the possibility of aligning these to a European context.
Not surprisingly, many were looking beyond regulatory compliance and how best to use stress testing to gain commercial advantage and better improve their risk management practices to be forward looking and more proactive than reactive. Most institutions recognised that conducting regular stress tests was good practice and beneficial. The question is could the results justify the expense, and to what extent are stress tests becoming more of a burden than the effective forward looking risk management tool intended?
Closely aligned to the regulatory environment and increasing pressure were data challenges, with the vast amount of data required to conduct effective stress tests in compliance with regulatory standards it is becoming increasingly difficult to procure the necessary data and ensure the granularity of that data. With the looming implementation of BCBS 239 standards, the need for clean and accurate data reporting and analysis is essential in passing both ECB and BoE Stress Tests. Regulators are placing greater requirements and demands on data submissions, requiring a more granular collection and gathering of data, which requires an implementation of infrastructure and architecture to support the exercise on an annual basis.
Last but by no means least, another key element to consider across the institution is reverse stress testing. With work underway to develop a robust infrastructure to support regular stress testing exercises, regulators then introduced Reverse Stress Testing. Working backwards from traditional stress tests, reverse stress-testing starts at the point where a business model is rendered nonviable.
'Reverse stress testing is a separate, but complementary exercise [to general stress and scenario testing]. It is essential that firms identify what could cause their business to fail and use this information to ensure that the relevant risks are sufficiently well-understood and appropriately managed to secure consumer protection and market confidence'
(FSA (UK) - Reverse Stress Testing)
The key points highlighted within reverse stress testing were an understanding of the desired outcome and what is it we are trying to do? Reverse stress testing scenarios have never happened in the past, they are not built around historical data, therefore how can risk scenarios not captured in risk systems be quantified? And how effective can they be with such little data to support rationales?
These are just a few of the topics highlighted throughout the research for the 2015 3rd Annual Stress Testing Europe, further discussion and insight will be delivered throughout the two days on key areas including; Capital, shock levels and scenarios, resilience to change, internal stress tests, operational risk, aligning departments and BCBS margin for non centrally cleared derivatives.
CFP’s line up of industry experts and thought leaders will provide knowledge and insight as to all the key elements to complying with regulatory stress testing. Interact and discuss with all our speakers through various interactive presentations and panel discussions, with plenty of opportunities to ask questions and start discussions.