2017 stress tests and leveraging lessons learnt towards 2018

2017 stress tests and leveraging lessons learnt towards 2018

David Biegel, US Head of Stress Testing at HSBC reviews 2017 stress tests and lessons learnt.
David, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I’ve got a somewhat varied background, although most of my previous roles have been related to finance in some respect. Previous roles have ranged from investment banking working as an economist in research to management consulting focusing chiefly on banking and finance to working as a regulator at the Bank of England. At the Bank of England, I helped design and implement the U.K.’s first public stress test. I’m now the U.S head of stress testing at HSBC.

At the Stress Testing USA: CCAR & DFAST Congress, you will be speaking on your insight regarding – An overview of 2017 stress tests and leveraging lessons learnt towards 2018. Why do you believe this is a key talking point and what do you think are the crucial things to remember?

I think we all recognize that the industry has been progressing capabilities on stress testing every year at a solid pace. So, as with years before, this year we again need to take stock and look at how we can do things better. I’d bucket this into two categories. First, we as an industry are always looking to continue enhancing our capabilities in stress testing to improve our understanding of our firm’s idiosyncratic vulnerabilities. Second, we want to streamline the processes required to run stress testing to make it a more nimble and efficient operation. The interesting thing we’ve found is that streamlining your process helps with the first goal, understanding your risks, because you get to spend less time on running the exercise and more time thinking about what the results are telling you.

In your experience, how can financial institutions best manage their preparation in uncertain regulatory times? And have you got any advice for your peers?

I would advise to do your best to look through the regulatory uncertainty and focus on doing the right thing for your firm. Doing that will usually put you in a good place. For stress testing, we want to continually improve our ability to understand risks to the firm. That objective should be critical to any bank’s core strategy. But it also happens to nicely align to what regulators are looking for.

How can institutions leverage results and lessons learnt from 2017 and use to increase efficiencies and improve the process for 2018?

Every institution will have their own particular issues when it comes to building a more efficient capital planning and stress testing process. So it is important every year to look at the end-to-end production timeline and identify the best opportunities to improve the process. Finding ways to automate wherever there is a manual process or data handoff is probably the most obvious area that institutions explore to streamline the process. This is important and there are multiple solutions available, ranging from focusing on consolidating most of the data and models into a few systems or building tools that leverage a firm’s existing infrastructure to better link systems and modeling tools together.

However, a critical examination of all areas of the timeline can help uncover other opportunities for efficiency gains. One simple thing we’ve done, for example, was to be extremely disciplined in front-loading discussions related to methodology so that nearly all methodology discussions happen before the production period in Q1. One way to do this is to systematically go through key issues that are recurrently raised in review and challenge sessions during the production period, and then ensure those issues are vetted and discussed earlier on in the process.

What, in your opinion does the future hold for stress testing professionals, and how can they keep up with the increasing changes in the industry?

I think a role in stress testing continues to be an excellent step in anyone’s career path. Most stress testing roles require engagement with multiple stakeholders in risk, finance and front office, which is great for building your professional network. You also have to understand what happens to the balance sheet and P&L under stress, which means stress testing roles give you a special vantage point on your firm’s strategy and business model, which is powerful information. And you have to be able to run a slick production, which is a great for building skills in operations, systems and IT.

Demand for people with stress testing experience also seems to be still outpacing the stress testing labor supply, so from that perspective it’s a great area to be in.

From my view, to stay on the cutting edge, it’s important to be vigilant in ensuring that the output from the stress test are useful to the business in helping them understand their risks and return on capital. It’s easy to get caught up in what the latest regulatory issue is. Of course, you have to ensure regulatory concerns are addressed, but focusing on what’s right for your firm will keep you anchored on a strong career trajectory.

David will be presenting at the Stress Testing USA: CCAR & DFAST Congress in New York City.