The role of stress testing in risk and capital management

The role of stress testing in risk and capital management

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


I was responsible for the Bank of England/PRA stress testing data collection – the FDSF – and the analysis tools used to support – first the individual supervisory stress tests and then the scaled up concurrent process introduced by the FPC. In doing that I discovered the correct importance of the various components of a stress test – and what some good practices should be.

At the Stress Testing Europe Summit you will be discussing the role of stress testing in risk and capital management. Why do you feel this is a key talking point at the Summit?

As the practice and process of stress testing matures it should become more of a sustaining capability. Having built a scenario analysis capability it should be fully part of the ICAAP and other planning processes.


Without giving too much away, what key takeaways should financial institutions learn from the 2016 EBA stress tests?

European stress testing is growing up and we’re now starting to see how the relationship to the Single Supervisory Mechanism will play out. We saw the hand of the ECB in the fact that the 2014 EBA stress test was more credible in having the AQR attached and now in 2016 we’re seeing how they’re going to operate through Pillar 2 and take the results of stress testing through the ICAAP into the SREP. At the risk of repeating myself – that’s the cue to join stress testing into those processes.


What challenges do you foresee for the stress testing professional in the next 12 months?


There are many. Some of the initial regulatory push for stress testing has died down – and yet the process of building the joined-up data capability required for good scenario analysis remains more of a long haul – so it’s going to be key to maintain good high-level sponsorship. Part of the answer to that is also part of the next challenge – by demonstrating a scenario analysis capability stress testing departments can expect to have to deal with more scenarios and what-if questions – and if they respond well enough them they can demonstrate the value in terms of a more general planning ability. Another part of the answer is to continue to work in a holistic way. IFRS9 and FRTB will consume some of the management attention and change budget but shouldn’t be considered in isolation as both contain stress test and/or scenario analysis requirements.