By Venkat Iyer, Director of PPNR Forecasting, Santander
The insights in this article are not necessarily representative of Santander
What, for you, are the benefits of attending a conference like ‘Stress Testing USA’ and what have attendees learnt from your session?
The Stress Testing USA conference brings together diverse functional and industry experts to talk about issues that are key and current in the field of stress testing. The benefits are clearly learning cross functional perspectives, challenges and paths forward in this critical field. The opportunity to network and become a better financial and risk management professional is extremely valuable. Equally valuable is the opportunity to talk about issues on top of your mind and share with fellow stress testing professionals. This also increases your and your organization’s brand awareness.
My session on Integration of stress testing with financial planning was paramount for almost all financial institutions as we transition from pure regulatory driven stress testing to use of stress testing in multiple business processes. Attendees learnt about the challenges faced on integration, what steps institutions have taken to integrate stress testing in strategic decisions and what the enterprise wide implications are of this integration.
How can risk professionals integrate Stress Testing with financial planning to help drive strategic decisions?
Integration is a multi-faceted effort and each financial institution and their risk professionals may have a different variant of what integration means to their organization. There are some common threads in this process. Stress testing is primarily used for capital planning in all big institutions driven by regulatory requirements. A natural extension of this exercise is to allocate capital based on stress testing to the different business segments as transactions in some cases. This process directly links risk to capital at a level where business decisions are made. Another area of integration is to use the sophisticated forecasting architecture from regulatory stress testing in financial planning exercise and leverage some of the models and methodologies there-in. Big financial institutions have made significant investments to build robust and controlled forecasting architecture for stress testing that can be leveraged for planning purposes and increases the return on those investments.
Please describe how effective stress testing can get ahead of emerging risks and trends using strategic planning?
Scenario based stress testing often involves consideration of emerging macro-economic and other risks that are specific to the firm. The financial performance of the firm and its lines of business under these different scenarios can provide rich information on how the financial institutions can plan under these environments. Integrating multiple scenarios in the strategic planning process can help the firm evaluate strategic and financial targets on a more holistic basis.
In your opinion, what key considerations need to be made when forecasting on budgeting.
Budget forecasting can be very different from stress testing forecasting and this has to be considered when integrating stress testing with budgeting. There is more focus on short range forecasts for expected macroeconomic scenarios compared to longer range forecasts under extreme scenarios for stress testing. Therefore, the models and methodologies applied to longer range stress testing may not apply well to budget forecasts, while near term trend analysis play an important role in budget and traditional statistical models, are not always appropriate. Judgement of business experts and consideration of near term business intelligence become important for budgeting.
Granularity and precision of forecasts can also be more important for budget. Typical budgets get down to detailed business line ledger accounts where the business can plan and monitor. These have to be considered when using a forecasting architecture that is designed for stress testing.
What do you see ahead for the future of integrating stress testing with financial planning?
There will be more emphasis on integrating stress testing with financial planning as we look ahead as increased efforts will be made to integrate stress testing resources into other business functions. There may be increased use of scenarios in the planning process and more investment in scenario design and monitoring. Increased understanding of macro-economics and use of macro-economic models in the planning process can be expected. Stress testing will become part of normal business processes and more discussion of stress testing results in committees and boards can also be expected. The use of stress testing in financial planning can also drive increased use of analytics and modern business analytics tools that can dissect the financial projections across various reporting and risk hierarchies. There will be more demand for financial and profitability information at different levels of granularity. All these may drive more refined optimization of the balance sheet and more data driven decisions.