Increasing efficiency in stress testing processes annually to increase value proposition

Increasing efficiency in stress testing processes annually to increase value proposition

By Richard van Tilborgh, Head of Capital Analytics, ING Group.

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

After obtaining a Master’s degree in econometrics, I started at ING Barings in 2000 as market risk analyst for the Trading and Treasury Books where I was involved in risk monitoring and development of risk and pricing models. In 2003, I joined the ALM department where I focused on modelling prepayment behavior in mortgage portfolios and replication of savings portfolios and improving the internal hedging program. As part of the Basel II implementation program, ING started in a Model Validation department where I was involved with developing and implementing validation processes for market risk models and for internal and regulatory capital models. In 2011, I joined the Risk Integration & Analytics department focusing on the Basel III implementation and with the further development of the Risk Appetite Framework. From 2012 I became involved in Recovery & Resolution Planning and from 2014 I fulfilled the role of Global Coordinator for Recovery & Resolution Planning. Since 2017 I am heading the Capital Analytics department which focuses on several elements of ING’s ICAAP process: risk appetite, stress testing, impact of regulatory developments as Basel IV.

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

There are many benefits of attending such conferences. First of all, it is a good opportunity to be updated on recent developments in the field of stress testing. Next to that, it is a good opportunity of different professionals to share best practices and to extend the network. With the upcoming final version of the EBA Guidelines on Stress Testing and the ECB ICAAP Guidelines, the regulators will further raise the bar for capital planning in general and stress testing specifically. A conference like this can be a good opportunity to take a step back from the day-to-day business and look at stress testing from different perspectives.

Can you provide some insight into how the stress testing process can be done more efficiently?

Stress testing processes can be executed more efficiently by focusing on standardizing processes. This can be done via e.g. developing integral dataset that allow banks to easily calculate the impact of different types of scenarios. Next to the data, we also see a need for more standardization in scenario generation whereby banks move from the classis scenarios developed by the economics departments to more sophisticated tooling that can provide multiple scenarios tailored to the business need.

What are the benefits of reviewing beyond immediate impact?

Reviewing scenarios beyond the immediate impact are essential when banks are designing their long term strategy and translate that in long term ambitions. Scenario analysis can provide insight into the feasibility of the strategy but also the sensitivity towards internal assumptions and external drivers.

In your opinion, how can financial institutions optimize business mix and capital?

Stress testing can be used as an important tool to optimize capital allocation and business mix. Currently most banks have these optimization processes based on balancing return and internal or regulatory capital requirements. Stress testing can provide useful additional information in this process since it can determine the impact of different scenarios on the risks and returns. This will especially become relevant when Basel IV is introduced where regulatory capital models will become less risk sensitive.

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

As mentioned above, from a conceptual perspective I expect that the outcome of TRIM (Target Review of Internal Models) and the introduction of Basel IV over the coming years will be a trigger for banks to more focus on internal risk analyses as regulatory models are becoming less risk sensitive. This will be another driver to focus more on internal capital analyses and different stress testing techniques. Looking at the macro-economic and geopolitical developments it is difficult to assess how the risk landscape is evolving. We may continue the upward trend from the previous years, but also may face a gradual slowdown of the economy. Whatever the outcome will be, I expect that geopolitical developments will be the key driver of this outcome.