Developing a Holistic and Transparent Critical Spreadsheet Evaluation Process for Stress Testing

Developing a Holistic and Transparent Critical Spreadsheet Evaluation Process for Stress Testing

By Diane Robinette, President and CEO, Incisive Software Corporation & Janine Jakubauskas, Financial Regulatory Manager, Signature Bank

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

Janine: I started my career at the Federal Reserve Bank of NY. The economy at the time was still struggling and the Dodd- Frank Act had just been signed into law. I worked on a lot of different things (i.e.; living wills, CCAR, etc.) and it was an extremely interesting time to be there given all the changes and new initiatives that were being undertaken. I eventually went on to work at HSBC as part of the End-to-End workstream within the Central CCAR team. As a result of these two positions, I understand both the regulatory and the business side of stress testing which I try my best to incorporate in my current role at Signature Bank. The question of how the regulators will view a decision or a piece of documentation is always in the back of my mind. When it comes to capital stress testing you can have a great idea and think it is sound but you must ask yourself are the regulators going to find this acceptable and if there’s a strong chance that they won’t you either need to re-evaluate, or if you feel strongly about it, be prepared to defend your decision.

Diane: By education, I am a technologist, earning a B.S. in Computer Science – Hardware/Software from San Francisco State University. I started my career as a systems analyst at Lockheed Missiles & Space Company where I implemented their first EDI program, followed by five years in management consulting at KPMG and EY developing eCommerce strategies. I entered back into the industry and served in executive and senior level roles at various technology companies including BroadVision, Contivo (acquired by Liaison Technologies), Covigna (acquired by ProQuest/Snap-on), Perfect Commerce and Proximex (acquired by Tyco).

I am currently the President and CEO at Incisive Software where our focus is on helping our customers — some of the most influential organizations in the world — achieve the visibility and control required to manage the risks inherent in their critical spreadsheets. There is no better tool than the humble yet powerful spreadsheet to give corporations the control they need — with the necessary flexibility and agility — to make decisions and make them quickly.

What, for you, are the benefits of attending a conference like the Stress Testing Congress and what can attendees expect to learn from your session?

Janine: I think it’s very important to attend these sorts of conferences. Attending and hearing from speakers from a variety of institutions allows the attendee to not only gain insight into what others are doing and how they are tackling similar issues, but also gives the attendee the chance to stay abreast of field related changes that may not currently be impacting them. Changes that are impacting one bank may not necessary impact another (ie.; due to bank type or geographic footprint) but this does not mean you should not be aware of them.

Attendees can expect to learn at a high level how to build a transparent and organized process for critical spreadsheet testing which is something applicable to all institutions. We’ll be walking through the steps starting from spreadsheet identification and risk rating of these spreadsheets to approvals at the Committee level. Tackling spreadsheet controls often times seems very onerous but it does not have to be if there is a well thought out plan prior to implementation.

Diane: The Stress Testing Congress is a great opportunity to connect with people, learn, and to share stories and best practices. What makes it better than others is the focus on a dedicated topic: stress testing.

Many companies still manage spreadsheets manually, and doing so in this manner is time and resource intensive, taking away from more important strategic activities. Surprisingly, it is more easily automated than one would think. So often we are asked by our customers how their peers are addressing spreadsheets. We’re excited for Janine to share how Signature Bank is taking a modern approach by building and implementing a spreadsheet policy around our spreadsheet management technology.

What specific benefits in DFAST exercises can internal auditors and regulators gain when implementing a spreadsheet evaluation process?

Janine: Having a defined spreadsheet evaluation process shows both regulators and auditors that you have taken the time to think of the best way to tackle this issue. Illustrative diagrams allow you to take an otherwise complex process and translate it into something that is relatively easy to understand. Regulators and auditors will appreciate this. Additionally, having a process you can speak to with the supporting diagrams and documentation helps articulate that your process is repeatable and transparent.

Diane: This is consistent with what we hear when it comes to the primary benefits. But, there are significant secondary benefits that should not be ignored, including productivity gains and driving higher team performance. Regulatory work is demanding work, and research has shown that when processes are well defined and repeatable, employees do better quality work and are less fatigued. Applying automation gains you speed, scalability and transparency into information, and relieving the burden on employees.

What challenges could arise when not addressing spreadsheet risk for model risk?

Janine: The biggest challenge is related to the data integrity issues that you’ll face in the absence of controlling for spreadsheet risk. If a spreadsheet has inaccuracies in it and you’re feeding it into something like your aggregator model, this could pose a very big risk that ends up impacting results. Additionally, not identifying spreadsheets that are used in your stress testing program is a risk within itself particularly when these are not being independently reviewed because they fall outside of the scope of validation related work.

Diane: Absolutely, data integrity is the biggest issue. Next is consistency or repeatability of process. Bottom line, it comes down to confidence and trust in the results. While Microsoft provides a wealth of capabilities for modellers to build these sophisticated, large and complex financial models in Excel, spreadsheets are not infallible. And neither are people. Ensuring the accuracy and consistency of spreadsheet-based financial models backed by a rigorous spreadsheet policy, procedures, and technology is key; without them, the results will be questionable.

How do you see the impact of Stress Testing evolving over the next 6-12 months?

Janine: What I will be paying attention to the most is any changes coming out of our regulatory agencies. Everyone is aware of the regulatory scale back that the Trump administration passed earlier this year. It will be interesting to see how the regulators interpret this going forward.

Diane: We ask our customers this same question to prepare for what they will need from us as they navigate these changes. What we know to be true is that we are living in a dynamic and ever-shifting business landscape: change and uncertainty, evolving expectations, increased pace of business, and as Janine mentioned changing regulatory environment. So, how can we do our part? We can commit to building our software with straightforward simplicity and continually innovate so that no matter what is thrown our customers’ way, we will be able to support them.

You may also be interested in our Stress Testing USA Congress…

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