Guidance Aims to Address Requirement for Institutions to Continuously Improve Stress Testing Management System
A leading banking expert at Wolters Kluwer Financial Services has outlined key actions to help Shanghai-based financial institutions address and prevent systematic and regional risks. The recommendations come in response to “The Implementation Opinion for Improving the Level of Stress Testing Work Level within the Jurisdiction of Shanghai” introduced by the China Banking Regulatory Commission’s Shanghai branch.
Wolters Kluwer Financial Services again highlights the importance of sound stress testing following recent news reports that 24 European banks failed their stress testing.
Spark Wang, senior regulatory intelligence expert at Wolters Kluwer Financial Services outlined the following recommendations for effective implementation:
- Establish a clear structure for governance within the organization. The roles of the Board of Directors, senior management, risk management department and business department in the stress testing work group must be expressly defined to create clear longitudinal and horizontal reporting mechanisms.
- Appropriately design the methodology. Stress scenarios must be defined based on current and future risk factors, businesses characteristics and stress behaviors, etc.
- Treat stress test results with importance. Institutions are required to submit results within 30 days of completion of the stress test. They must also immediately adjust credit policies based on any weaknesses revealed during testing.
“Institutions must be able to define scenarios for exposing the risk factors to which instruments within the account and portfolios are exposed,” said Wang. “Stresses can range from simple to complicated rule-based shocks applied to single and/or multiple and integrated risk factors. They may also include algorithms for simulating the stochastic evolution of stress VaR. The impact of stress testing in Liquidity, Value and Income must be calculated and reported accordingly.”
Wolters Kluwer Financial Services' financial risk management solution includes stress testing functionality and allows firms to define and implement their own stress scenarios. The full text of the CBRC guidance is available in the China Banking & Reference, currently available on a free trial basis.