Stress Testing – Aligning with regulatory expectations while meeting business needs to ensure relevant outcomes

Stress Testing – Aligning with regulatory expectations while meeting business needs to ensure relevant outcomes

By Jian Hu, Executive Director, Risk Analytics, Morgan Stanley

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

Jian Hu is an Executive Director and Head of Macroeconomic Forecasting at Morgan Stanley where he manages a team of quantitative professionals and is responsible for designing macroeconomic and financial scenarios, developing econometric models used in the creation of the firm’s BAU, CCAR and CECL scenarios, and providing guidance and requirements to the high-priority infrastructure projects supporting scenario design. Prior to Morgan Stanley, Jian was an Executive Director and Head of Business Forecasting and Modeling where he led a team of quantitative analysts in building business forecasting and stress testing models (PPNR) to forecast a wide range of balance and risk metrics for UBS Wealth Management Americas (WMA). Jian was a Director in the Credit Analytics group at Moody’s Analytics, where he managed a team of economists in developing customized credit risk forecasting and stress testing models for financial institutions. He has published research in the areas of structured finance and financial markets and has given presentations at various academic and industry conferences. Before joining Moody’s Analytics, Jian worked at Fannie Mae as an economist. Jian holds a PhD in economics from Southern Methodist University and a MSc from Stockholm School of Economics. He is a CFA charterholder.

What, for you, are the benefits of attending a Congress like the ‘Stress Testing USA Congress’?

I’d like to keep abreast of the recent developments and best practices in scenario design, scenario generation and stress testing in general and gain industry perspective on trending topics, such as CECL scenario design. The conference also provides a great opportunity to network with regulators and peers in the same field, gain insights on regulatory expectations and exchange our views on the challenges and opportunities facing the industry.

Why is it so important to align BAU and CCAR scenarios?

Alignment between BAU and CCAR scenarios is a cost-effective way to utilize existing CCAR stress testing capabilities to improve capital planning, limit setting and decision-making processes in risk management. It also helps senior management form a consistent view on global economic outlook and assess the potential impact on firm’s balance sheet.

Can you give our readers a couple of examples of ways in which risk professionals can use practical means to calibrate appropriate shock levels?

‘Historical Benchmarking’ would be a practical approach in calibrating appropriate shock levels. In order to assess reasonableness of shock level, risk managers can quantitatively calculate severity score and compare it against the scores of historical recessions.

What are key things to consider when utilizing stress testing to enhance collaboration?

Leveraging stress testing capabilities in BAU activities is a good way to enhance collaboration and add business value to the day-to-day risk management practice.

How do you see the stress testing regulations evolving over the next 6-12 months?

I’d like to watch how the SCB (“Stress Capital Buffer”) rules would affect the capital planning decisions at CCAR and GSIB (global systemically important bank) banks.

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