Aligning risk disciplines for a more integrated stress testing approach

Aligning risk disciplines for a more integrated stress testing approach

  1. Marc, can you tell the audience about yourself and your experience within the banking industry?

I have close to twenty years experience in the banking industry mostly within BNP Paribas, but also within Dresdner Bank and Crédit du Nord earlier in my career. For BNP Paribas, I have had numerous financial and business experiences at different levels of the organization, the last one having been CFO of our Global Markets activities. Since February this year, I am heading the Group framework on stress testing and planning shared between Group Finance, Group RISK and Group ALMT.

  1. Can you outline some of the consequences and advantages of a more integrated approach on stress testing processes?

Stress testing demands mixing a lot of competencies which are difficult to gather in a sole team for large financial institutions. Bringing together on this topic the competencies of key Group functions is a great success factor to work notably on the bridges that have to be established between various risk expertises.

Stress testing demands also a lot of data and huge computational power. Sharing and co-building these facilities save time and costs. New technologies enable now to review and regroup previously split frameworks due to size constraints.

  1. Why is it essential that financial risk experts are consistent between controls and methodology when looking for a more integrated stress testing approach?

Building a relevant control framework is required by regulators for the full stress testing framework. Having a shared platform, to develop the various typologies of models and applying standard development processes fasten the control tasks and rationalize their costs. Some proximity is needed between model developers and model controllers to anticipate model structuration for control sets and at the same time build relevant sets of controls capturing the real model risks.

4. Can you explain some of the challenges in creating credible scenarios to account for key risks and projections?

Creating credible scenarios demands a risk identification process implemented over the full perimeter of the institution and regularly reviewed. Based on the effective weaknesses of the organization, past and forward looking numerous data analyses provide the background for building detailed scenarios. A review of the consistency of the various features of defined scenarios demands expert reviews with complementary competencies. On a large institution, the scenarios have then to be sufficiently enriched to be properly understood by all subsidiaries or branches of the Group in any location over the globe. Reaching that level of precision is a real challenge in terms of data and expertise gathering.  Projections have then to effectively apply the defined scenarios. This requires to have models developed in consistency with the scenarios defined or adapted to properly assess them.

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

Stress testing professionals will be very demanded over the next 6-12 months in a context of growing recourse to these analysis both by supervisors and by governance bodies of financial institutions. They will have to adapt to a widening of the risk factors to be stressed with notably operational risks being more and more taken into account. They will have also to follow the pace of evolution of the information technologies to enhance the risk perimeters covered and to gain in efficiency.