CeFPro research: What does the future hold for stress testing?

CeFPro research: What does the future hold for stress testing?

Guglielmo Migliori article banner

By Guglielmo Migliori, Senior Research Executive, CeFPro. 

The financial industry is currently in a very delicate position given the uncertainty surrounding new regulations coming into force within the next few months; organizations are finding themselves faced with questions that need to be answered as soon as possible.

In light of this, the Center for Financial Professionals conducted extensive research with leading industry experts to identify the current challenges, opportunities and emerging trends ahead within stress testing. The results of this research will be highlighted and discussed in depth at the upcoming Annual Stress Testing USA Congress, taking place in New York City. Over 150 industry experts will join to discuss the future of stress testing, regulatory changes, leveraging technology and moving towards automation.

During our research, one of the key themes highlighted was how to effectively utilize stress testing to be in line with and satisfy new regulators’ expectations; whilst also managing the varying interpretations across jurisdictions and ensuring compliance. At the Stress Testing USA Congress, we will hear invaluable insight on this matter from the Federal Home Loan Bank of New York, SunTrust and PNC.

Aligning with regulatory expectations is however, not the only goal to achieve – Meeting business needs is crucial for the success of an institution. During our research, a couple of outcomes were highlighted, including:

  • Having a wide number of stress scenarios – So that business drivers may support stress factors identification and the calibration for appropriate shock levels; and
  • avoiding the scenarios that only create a large amount of working time, with limited insight and results.

How can we create achieve effective collaboration? – The research we conducted has speculated that different systems and scenarios can be pinpointed to potentially achieve a holistic approach to improve global operations, so that wider collaboration can be achieved within stress testing practices.
It can be argued that stress testing needs to be thoroughly analysed to understand if it should still be a priority within strategy plans; the stress testing congress in November will provide a platform for professionals to study different firms’ behaviours. But they key question that has highlighted is – What if stress testing is relieved, have we got alternative plans?

Although it can be seen as a big burden due to the sheer number of people involved, stress testing can have a positive impact on team collaboration. The information from the risk standout has forced organizations to pull everything together and in doing so, pulling together a unified picture of risk – There could be many pros in unifying the risk pictures, both for interest rate risk and operational risk.

“We are looking at the opportunities outside, so stress testing can be used for enhanced scenario analysis, for really beneficial outcomes and information” – Model Risk Director ($1tn to $1.5tn assets under management). 

Another of the key areas we are going to address at the Stress Testing Congress is the impact of CECL on stress testing. It is crucial to understand the implications for a lot of business decisions, because institutions will have to manage multiple regulations, such as stress testing and FRTB. A similar approach has been suggested during the research between CCAR and CECL; given the heightened regulatory expectations and the control environment.

An additional feature of our research was the post-implementation challenges of CECL and its integration with stress testing; financial organizations will have to leverage existing infrastructure to align all the different risk practices; and this could mean implementation challenges arising with data, systems and modeling approaches.

“Probably some of the models we use in capital planning may be leveraged for CECL, but this will have a major impact on the financial industry, given that it will trigger a provisioning once a new loan facility is provided” – Director, Group Internal Audit ($2tn to $2.5tn assets under management). 

The Center for Financial Professionals will assess the alignment between stress testing and business needs, to increase efficiency across institutions, at this year’s Stress Testing USA Congress taking place in November 6-7 in New York City.

You may also be interested in…

Make your free account