Effectively incorporating stress testing into business as usual practices across the business

Effectively incorporating stress testing into business as usual practices across the business

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Manan, can you please tell the Risk Insights’ readers about yourself and your professional experience?
Sure. I am currently looking after Scenario Design and PPNR Modeling for HSBC’s stress testing team in the U.S. Prior to this role, I have been responsible for risk management, portfolio management, and trading across several asset classes on both the buy and sell side for various banks and hedge funds.
You presented at the Stress Testing USA: CCAR & DFAST Congress where you discussed how to effectively incorporate stress testing into business as usual practices across the business. Why do you feel this is a key talking point at the Congress?
For banks that have been through multiple cycles associated with CCAR / DFAST, the next important phase in development is the integration of the processes associated with stress testing and corporate financial planning which spans several aspects of capital and dividend policies, risk appetite, and risk adjusted return management.
Incorporating stress testing into business as usual is a popular discussion in the industry, is this a sign of the stress testing process leveling out and organizations getting to grips with it?
I think it is a natural discussion to be held given the scope and intensity with which banks have made the investment to develop a robust stress testing infrastructure. It is in everyone’s interest to utilize this buildout to address multiple competing objectives including regulatory driven constraints as well as internal constraints that are more geared towards managing shareholder value.
From the perspective of a larger institution, what are the key challenges of implementing stress testing into BAU, and overriding current structure and controls?
There are several challenges including culture, breaking down corporate fiefdoms, reconciling the way risk and finance view the same issue, willingness to incorporate stress testing at the top of the house, and technology / data issues.
How do you see the industry progressing over the next 12 months as we gear up for 2017 tests?
I see the industry continuing to explore ways to enhance the current process and push forward on initiatives that clearly embed stress testing into a BAU context. A good example of this was the recent supervisory scenarios during CCAR 2016 in which one of the scenarios included an assumption around negative rates. This feature alone compelled financial institutions to do a deep dive to review and validate approaches to deposit pricing, deposit balance forecasting, PD modeling within the financial sector, and other related matters. In essence, banks had to potentially modify the way they think about these important issues as a result of this potential market outcome.

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