A unified regulatory stress testing platform

A unified regulatory stress testing platform

Nageswara, can you please tell the Risk Insights’ readers about yourself and your professional experiences?

Based out of London, I am part of the leadership team of CRISIL GR&A’s Risk & Analytics practice in Europe. I have over 12 years of experience in business analysis, programming/modelling, ‘solutioning’, and program management in derivatives and risk functions.

I have spent about 9 years at CRISIL, helping our clients in various areas including market risk analytical tools/framework implementation, stress testing, model validation and FRTB. The clients I have worked for include investment banks, insurance/pension firms and a regulator.

In the past two years I have successfully led various time-sensitive regulatory stress testing assignments for different clients of CRISIL. These include developing scenario expansion models for EBA stress testing, a scenario-expansion tool, and CCAR and EBA stress-testing frameworks.

At the Stress Testing Europe Summit, you will be delivering a presentation on a unified regulatory stress testing platform. Can you please explain some of the benefits of having a unified platform?

For the past few years, stress testing has become part and parcel of the daily risk function. With overlapping regulatory regimes, stress testing has become a ‘throughout the year’ affair and thereby making it a ‘run the bank’ function. Year after year regulators are releasing different stress scenarios under which banks must test their portfolios and report results. With different regulators releasing different sets of scenarios at different intervals for different time horizons, banks must repeat multiple times the stress testing steps of scenario design, scenario generation, scenario expansion, and reporting (once in a given interval for every regime). Consistent and detailed reporting is the key here.

A unified stress-testing platform aims at taking advantage of both commonalities and differences among these regulatory regimes and tries to achieve both consistency in each of the stress testing steps across different regimes and the time and effort efficiencies.

We at CRISIL are helping banks in this area by providing implementation thought leadership vis-à-vis designing a robust framework, technology and analytical tool development.

Without giving too much away, what are some of the key differences between CCAR, EBA and PRA regulatory stress testing regimes?

There are commonalities and differences among these regulatory regimes. It also depends upon the perspective with and purpose for which we are analysing these regimes.

For example, the scenarios provided by each regime are different and have different granularity levels. But in the context of tens of thousands of risk factors governing a typical bank’s portfolio, all these scenarios can be said to have high granularity levels.

But some of the key differences we like to include, especially while thinking through a common platform-kind-of solution, are:

– Shock types;
– Length of the horizon the scenario is to be tested/projected;
– Modelling approaches; and
– Reporting templates and requirements.

How do you see the role of the stress testing professional changing over the next 6-12 months?

We at CRISIL see banks adopting more and more automation vis-à-vis each and every step in stress testing. In the coming months, we expect to hear a lot about efficient stress testing frameworks. It won’t be a surprise if banks entertain new technologies and innovations in this area including big data and analytical platforms. But it is very imperative for stress testing risk managers to become more and more techno-functional. Banks cannot think of building efficient frameworks without the help of these analytical frameworks. In this dynamic regulatory era, with banks’ own IT teams getting stretched into different change projects such as FRTB and IRRBB, risk managers must provide necessary techno-functional leadership towards achieving common, unified, efficient stress testing frameworks.

We at CRISIL have helped various banks develop and implement efficient analytical frameworks for stress testing. We are at the forefront helping risk managers achieve techno-functional thought leadership vis-à-vis implementing stress testing analytics within their functions.