The future of stress testing and financial markets: Reviewing requirements globally amongst economic uncertainty

The future of stress testing and financial markets: Reviewing requirements globally amongst economic uncertainty

By Jeff Simmons, Managing Director, Head of Enterprise Risk Management, Bank of Tokyo Mitsubishi.

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

Well I guess you could say that I have been in the risk industry since it first started. I am a qualified accountant and so “grew up” in Finance. We know that Risk Management, especially on the quantitative side was basically “spun out” of the more traditional finance functions and started to grow to be where it is now. I have been lucky to be part of that journey working in the development of Risk Management Systems, model validation and then line risk management. My line risk management started off in the Emerging Markets arena and so the transition in Credit was relatively straight forward for me. The GFC landed me into all things Capital and ICAAP related including the building of Enterprise Risk Functions. Now I am involved in the Brexit Strategy for MUFG Securities, a role that is just as challenging as it is uncertain given where “Brexit” is in the political sphere.

What, for you, are the benefits of attending a conference like the ‘Stress Testing Europe Summit’?

I want to discuss the issue of education with my fellow professions and see if they agree with me in that it is one of the key areas of development going forward.

You will be participating in a panel discussion to discuss the future of stress testing and financial markets. What do you think will be the key talking points amongst panelists and why?

I believe that banks are trying to address the issue surrounding the embedment of Stress Testing into their ICAAP’s by leveraging off the infrastructure that they have developed for the standard Regulatory Stress Testing. This infrastructure is not just technology based, though a lot of investment has been made in this area. The other areas though are in methodology and governance. There have been significant advances in the way in which we create scenarios, and how we parameterize them. These advances have enabled us Risk professionals to be more consistent in our approach and have a better “explanation” capability. This was definitely lacking some years ago. In terms of governance, this is where the real progress has been made, but unfortunately I think we have a lot more to do in this area. Senior Management can rely on the governance of the framework through the organisation. But it is through that organisation that we need to really embed the Stress Testing of our capital. It is this embedment that I will be interested in discussing with the other panelists.

In your opinion, what does the future of stress testing and financial markets hold?

Well, as I just alluded to, the future of stress testing lies in the embedding of the framework into the entire organisation, and not just at the senior management level. If we think about how our organisations work, decisions are being made at all levels. On a trading desk, decisions are made every day which impact our profitability and capital position. It is these areas where we need to reach, to embed the value of stress testing into the daily operations. Technology can help with this, as can governance and methodology, but we have to ensure that the organisation has the right education.

What are the biggest impacts of changing operating models to incorporate change?

The answer to this is simple, it is all about people. Systems can be changed, processes and Governance can be enhanced but it is people who really hold the key. I believe it is imperative to bring them along on the journey, even if it is not pleasant. Uncertainty over a persons future can be quite damaging and insidious.

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

For a lot of banks and financial institutions I think that Brexit will dominate their thinking, and this certainly wont stop at 23:00 on the 29th March 2019. Risk is playing a major part in this, and certainly the European Regulators expect their dedicated involvement. A pure “back to back” framework will not be accepted by them, and so there will be real risk in these new European banks. That risk will have to be managed and controlled in that bank by local staff. This will change the way in which operate, and so I believe that a more Enterprise Wide philosophy will need to be adopted.



We asked Jeff some informal questions...

What three items would you take with you if you were stranded on a desert island?

All I would want is access to the news and a stock of books. The third item would be my blackberry. Sadly as the charger would count as a fourth item it could not be taken, so once the battery was flat there would be no more interruptions.

 If you had not taken the career route to become a financial risk professional, what would you be doing right now?

That is a good question and I am not sure of the answer. I would like to say that I would have stayed in Academia, but most likely I would have stayed on the commercial side of finance and ended up as a CFO or such like.

 What has been the highlight of your career so far?

I would say that building a European network for the MUFG Bank Risk functions. When I joined here over 3 years ago each function was relatively independent. I was responsible for bringing them together into a common framework and that is my highlight.

 What TV show if your guilty pleasure?

I have my own Private Pilots License and so I am quite addicted to “Air Crash Investigates”, more from a sense of “I wonder what I would do” than anything technical.

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