Aligning stress testing with BAU practices

Aligning stress testing with BAU practices

By Jeff Simmons, Head of Enterprise Risk Management, Bank of Tokyo-Mitsubishi UFJ.

Jeff, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I am currently the Head of Enterprise Risk at BTMU, but it has been a long road to my current position. I have really been in risk management since its birth, probably too many years ago now to count. I started off my professional life as an Accountant, and am qualified as such. When I came here to the UK in 1989 Accounting was starting to become more quantitative and a lot of banks were building centralised accounting and forecasting platforms which were the genesis of our profession. The organisations then continued to venture deeper into those strange fields, things such as Interest Rate Risk and scenario modelling being on the “exotic” side of risk. This was a natural step for me given my semi-quantitative background. From there I moved into the financial modelling world of risk in a model validation phase of my career, mirroring the development of risk management from an accounting based financial modelling arena into a more quantitative framework. Risk then took me briefly into the Hedge Fund world before I re-entered banking within the capital sphere, focusing on the new aspects of capital and regulatory management coming out of the Global Financial Crisis. Finally I “arrived” at Enterprise Risk, the land where risk and finance start to meld back together, coming, in a way full circle back to my accounting roots.

At Risk EMEA 2018, you will be speaking on your insight regarding ‘Aligning stress testing with BAU practices for a more integrated view of risk and results’. Why is this a key concern right now? And what are the essential things to remember?

This is in fact a very interesting topic. The alignment of stress testing into BAU in an integrated fashion is something that I believe we, as a risk profession, still have a lot to do. The Regulators are now of the view that ‎we have stress testing embedded into our organisations because the results are discussed at the board level. I would argue that it needs to be embedded at all levels of our respective organisations and this journey is just beginning. Remember, stress testing has been around for many years, including before the crisis and so we need to ensure we use the current momentum to really embed it into our infrastructure.

Why is updating governance through regulatory feedback a key area for 2018?

I believe governance is essential but not just for ensuring proper process has been followed. We have to continue on the journey of embedment with regards to stress testing and a robust review and challenge framework is a vital component of that. Robust review and challenge means that we can have confidence in the outcomes and that confidence then will be a part of our decision making process. Governance extends into all aspects of the framework, and includes methodology, scenarios and data. The governance of the latter has been neglected somewhat despite the efforts of the Regulator with BCBS239 and Anacredit

Without giving too much away, can you explain the importance of understanding the way senior managers think about stress testing and risk?

There is not a lot to give away here I am afraid. Let’s compare senior management “interest” in stress testing now and prior to the Global Financial Crisis. I use that period because that is when the Regulators forced senior management to be interested. The threat of being a front page‎ headline as a result of failing the stress test tended to focus their minds somewhat. So, what has changed, those same organisations had a stress testing framework before the crisis didn’t they? Well I believe the Regulator has taken the uncertainty out of the scenario and this has been an important element. Before we struggled with scenario probabilities which complicated the formulation of mitigation plans. Now we have scenarios which are given as a statement of fact, senior management have something certain now to act upon. Before there were pros and cons of acting on the results, now they have no choice.

Why is creating an integrated view of risk and results important?

Well that is either an easy question to answer, or an impossible‎ one. It is obvious why it needs to be integrated. Risk is a bit like “whack a mole” with new concerns arising in seemingly random places at seemingly random times. We need a framework for early warning to management, that is after all what we do. These early warnings have to be credible, timely and relevant. An integrated view is essential to satisfying that requirement. However, and now for the impossible part, how do you separate risk and stress testing. I don’t think you can, they are just different dimensions of the same element. Our responsibility is to appraise senior management of the implications of several different outcomes. Whether that is a simple PV01, or a complex integrated scenario, conceptually it is all the same (in my mind anyway). We embed these within our risk appetite frameworks, and then link it into our limit setting process. Separation is impossible, integration essential.

How do you see the risk landscape evolving over the next 6-12 months?

I think we are in for some interesting times over the course of the next year or so. First we need to get the wave of Regulatory requirements out of the way, IFRS9, AnaCredit, FRTB, MIFID, GDPR etc etc. This has, for‎ too long now dominated our thinking, I would argue that even Brexit hasn’t consumed as many resources as some of these projects. And so what for 2019, finally can we sit back, put our feet on our desk and catch up with that book we have always wanted to read? I don’t think so, I believe that our management are going to want to see a return on their investment. We have this stress engine that the regulator demanded we build, so use it. The number of scenarios will increase as will the demand for more analysis. Our technology departments will come to us with fresh ideas on machine learning and AI and we will start to see these ideas being embedded into our frameworks. So, exciting times ahead I think.

We asked Jeff some informal questions… 

What would you say is the highlight of your career so far?

The highlight of my career is a difficult one, as with any career there have been ups and downs. The highlight though was the formation of a Regional Framework for Risk here in MUFG. When I arrived it was a series of independent offices with their own risk departments. To see a cohesive band of colleagues working together and discussing risk issues was an achievement which I will always look back on with pride.

What do like to do after a long week at work to wind down?

I have a private pilots licence and so fly when I can. I also am a season ticket holder at a football club which I won’t name given where we are in the table. My wife has a small business buying and selling LEGO (yes the small plastic bricks) and I like the “no mental effort required” process of sorting and grading it. I can switch off and clear my mind. Some people do yoga, or shiatzu or have acupuncture, I sort lego!

What came first, the chicken or the egg?

This is an easy one, it is the egg obviously. An egg, or the concept of an egg has been with us since the beginning of life itself. An egg or a seed is a container of genetic material for the development of life, be it a ‎tree or a chicken. The concept of it is quite extraordinary when you think about it especially when you think that 2 eggs, seemingly the same can produce a chicken, or a duck.