Can you tell the Risk Insights’ readers a little bit about yourself and your professional experience?
I currently work for Moody’s Analytics as a subject matter expert with a focus on capital planning and stress testing. In this capacity have the opportunity to work with a diverse group of clients to help them develop stress testing solutions that meet regulatory requirements as well as their business needs.
Prior to joining Moody’s Analytics, I worked for ten years at the Federal Reserve. During my time at the Fed I was able to contribute to many System level initiatives related to capital planning, credit risk, liquidity risk, interest rate risk, and model risk management. Additionally, I was involved with the Fed’s supervision of capital planning initiatives including leading horizontal evaluation teams focused on Foundational Risk Management, Capital Adequacy Assessment, Capital Policy, Model Risk Management, and Governance. Earlier in my career I worked in the Treasury Division of two regional banks focused on interest rate risk modeling and economic capital.
You presented at the Stress Testing USA: CCAR & DFAST Congress where you compared SR 15-19 with 15-18. Why do you believe this is an important talking point?
Understanding the Fed’s capital planning guidance is a precursor to being able to develop a stress testing program that is the proper fit for an organization. When the Fed issued SR 15-18 and SR 15-19 they further documented their approach to tailoring supervisory expectations for firms of varying size and complexity. Additionally, contrasting the differences between the expectations for these two groups of firms can provide insight for what is expected for mid-sized DFAST firms.
What difficulties are FBOs facing?
FBO’s that have formed IHCs are in a very unique situation. They are facing an uphill battle that includes developing foundational risk management processes that are aligned with supervisory expectations and sizing the amount of capital they will need to support their US operations.
Without giving too much away, what are the key differences between the requirements for large, complex banks and the less complex?
The new Capital Planning guidance issued in 2015 by the Fed reiterated the importance of risk identification, governance, and internal controls for all large BHCs. However, when comparing the supervisory expectations for the three distinct portfolios (Large and Complex, Large and Non-Complex, and Midsized DFAST) a few key differences are evident:
1) Formalization of Oversight and Governance
2) Sophistication and Rigor of Loss/Resource Estimation and Model Risk Management
3) Integration of Systems for Other Risk Management Processes (including Recovery Planning)
As a brief overview, what are the key differences and changes DFAST banks should prepare for?
The themes outlined earlier in relation to the differences between large and complex firms versus large and non-complex firms should generally trickle down to mid-sized DFAST firms. I expect there will continue to be a significant focus on risk identification, process governance and internal controls. I expect there will also be a continued expectations that mid-sized firms would continue to improve their processes for estimating losses and revenues.
How do you see the role of the stress testing professional changing over the next 6-12 months?
I anticipate the role will continue to be interesting and challenging; however, I think the focus will shift from continually rebuilding loss and resource estimation methods to process efficiency concerns. Many firms continue to struggle with excessive process cycle times filled with manual adjustments. Rethinking, and rebuilding processes to achieve a target operating state that incorporates other enterprise risk management needs (liquidity stress testing and recovery planning) will be an emerging topic of conversation.