Building an effective stress testing framework and robust forecasting process

Building an effective stress testing framework and robust forecasting process

We interview Luca D’Amico, EMEA Head of Risk Management Sales at Copal Amba , for his thoughts on building effective stress testing framework and robust forecasting and the benefits of using the right stress testing tools. Luca will be presenting at the upcoming Stress Testing Europe Summit in October.

Luca, can you tell the Centre for Financial Professionals’ readers about yourself and your professional experience?

I’ve spent about 15 years in the risk management space, including the consumer market and large corporate segment. In the past four years, I have worked with several strategic clients at Moody’s Analytics on several different areas, including stress testing. I recently joined Copal Amba (a subsidiary of Moody’s Analytics) to further expand our operations in Europe.

In your session at the Stress Testing Europe Summit, you will be looking into an effective stress testing framework and robust forecasting process. Why do you believe this is a key talking point for the Summit?

In risk management, stress testing has become a pre-requisite to regulatory reporting requirements. Today, stress testing is a crucial recurring activity for most banks, involving various functions (Risk, Finance, Treasury, etc.) and processes. Without a robust forecasting process and stress testing framework in place, banks may not be able to meet their regulatory capital requirements, in turn leading to potential turmoil in the financial markets. This is why it is paramount that each bank puts in place a robust and consistent framework to address the regulator’s requests in a timely manner.  At Copal Amba, we ensure that our clients meet their regulatory requirements and also gain a competitive business advantage from it.

Without giving too much away, what are the benefits of using the right stress testing and scenario analysis tools and how can institutions gauge the right tools for them?

Stress testing by banks no longer follows a pre-set course and has expanded to multiple extensive scenarios. Financial institutions not only need to rethink these expansion scenarios, but also revisit their existing models and adopt new technological tools that make this entire process smoother. In short, I believe the key benefit will come from breaking the traditional “silos” approach, which would provide opportunities to rethink data, models, scenarios, technological tools, and governance in order to be consistent and effective; at Copal Amba, we have the skills and experience to help clients achieve this. In addition, we harbour expertise in well-accepted software like R, SAS and Matlab to ensure that our clients stay ahead in the game.

How can institutions ensure they are gaining maximum value from their stress testing process?

To gain value from the stress testing process, it is crucial to use the stress testing framework for all strategic activities of the bank. Also, stress testing should not be seen just as a periodic exercise, but also to employ the results for making business decisions. Stress testing should not be limited to the model developers and model end-user level, but also include those at the board of directors and senior executives’ level.  For instance, stress testing should be implemented across different verticals of each bank to define limits and pricing for capital planning and allocation, strategic planning and M&A, and for any other strategic decisions. Copal Amba provides services not only in stress testing models, but also helps clients build a robust stress testing framework that can be implemented organisation-wide.

How do you see the role of the Stress Testing professional in both CCAR and DFAST changing over the next 6-12 months?

With the dynamics in financial markets changing every now and then, stress testing has become immensely important. Stress testing today involves expansion across multiple scenarios and is a demanding task. There has been steady growth in demand for stress testing professionals, and the roles of stress testing professionals have evolved very quickly within organisations. We expect the need for stress testing professionals to grow even more, not just in size but also in competence, as we expect regulatory pressure to remain strong in the near future. With more stringent stress testing requirements under CCAR and DFAST guidelines, demand for third-party risk reporting advisors like Copal Amba is expected to pick up.