What is Stress Testing in Risk Management? | SAS UK

Stress testing in risk management often involves highly complex, computer-generated simulation models that use hypothetical scenarios as their testing ... SASInsights FreeWhitepaper       WhatisStressTestinginRiskManagementandWhyisitUseful? Discoverthefundamentalsofstresstestinginriskmanagementandhowitcanbenefitfinancialorganisations. By:DavidFerguson,SASInsightsEditor Stresstestinginriskmanagementofteninvolveshighlycomplex,computer-generatedsimulationmodelsthatusehypotheticalscenariosastheirtestingframework–analysinghowanorganisation’sbalancesheetrespondstospecificsituations. Forexample,inaperiodoffinancialuncertainty,financialorganisationscandeploythesemodelstoanalysemarketandportfolioriskandmakeinformeddecisionsbasedontheresults.Havinghigh-qualitydataattheirdisposalfollowingstresstestsinriskmanagementwillenablefinancialorganisationstobemoreefficient,mitigateriskandidentifyproblemsearlyon. Thefinancialcrisisof2007-08forexample,representsaprimeexampleofpoorportfolioriskmanagement.Excessiverisktakingbylargebanks,lackoftransparency,financialregulationfailureandsubprimelendingresultedinthecatastrophiccollapse,leadingtowidespreadcallsforchangesinfinancialregulation.And,asadirectresult,theindustryhaswitnessedasignificantshiftinbankregulationandsupervision,especiallyregardingregulatoryreportingandmarketriskreporting.Theframeworkatthetime,BaselII,wasoverhauledandreinforcedwiththeBaselIIIframework.BaselIIIwasdesignedtoexpandtheregulatoryscopeofriskmanagement,ensuringthatfinancialorganisationsarelegallyrequiredtocarryoutcomprehensivestresstesting.Thisenablesthemtomanageriskanddeterminetheirabilitytosurviveinspecificfinancialcircumstances. FromJuly2018,underBaselrules,banksmustproducestresstestsunderanIFRS9(InternationalFinancialReportingStandards)basis.Inaddition,theymustalsofullydocumenthowthestresstestresultswerearrivedat.Subsequently,tomanagethestresstestingprocessmoreeffectively,mitigateriskandensurecontinuedregulatorycompliance,financialorganisationsneedasingle,coordinatedstresstestingsolutiontomanagetheirbalancesheet. WhataretheelementsofBusiness-DrivenStressTesting? StressTesting2.0:Betterinformeddecisionsthroughexpandedscenario-basedriskmanagement.Buildaroadmaptogainmoreeffective,consistentanalyticalprocessesfordynamicbalancesheetmanagement. Downloadthewhitepapernow Whatarethebenefitsofastresstestingsolution? Withnewgovernance-relatedrequirementsonstresstestingbeingfrequentlyupdated,thereisaclearneedforacomprehensivestresstestingforriskmanagementsolution.Forlargerfinancialorganisations,stresstestingishardlynew.Whatisnew,however,isthelevelofcomplexityandtransparencythesetestsrequire. Currentregulationsandrequirementsforrobuststresstestingmeansthatfinancialorganisationsneedtobebothconsistentandtransparentwiththeirresults.Thismeanscentraliseddata,dataprovisioning,consolidationandaggregationhavebecomekeyaspectsthatneedtobeconsideredtomeetregulatoryrequirements. Problemsthatsomefinancialorganisationsfaceinthepursuitoftransparencyandaccuracyareoldsystems,inefficientinfrastructureandtroubleimplementingandreportingonriskmodels.Oldsystemsmayresultindatasilosacrosstheorganisationanduseinconsistentdatadefinitions,makingitdifficulttoconsolidatethatdataanddevelopaconsistentandrepeatableprocess.Inefficientinfrastructureresultsindisconnectedprocessesthroughoutthemodellifecycle,leadingtoinconsistenciesinthestresstestingresults.Lastly,financialorganisationsmaynothaveawell-structured,documentedandtransparentprocessthatmeetsregulations,whichmeansstresstestingresultsareoftenerroneousandfragmented. However,withstresstestingsolutions,riskmanagementcanbeforensicallyanalysedonasingle,centralisedplatform.Financialorganisationscanrunspecificandcustomisedfinancialscenarios–allofwhicharecompliantwiththelatestregulations–tosupport‘what-if’assertions,assessportfoliorisk,andmanagecapitalplanning. Utilisingstresstestingsolutions,everyoneinvolvedcanworkfromthesame,fullyintegratedandreconcileddatasourcethatincludesconsistentdatadefinitionsandadatahierarchy,ensuringthatstresstestingisreliable,accurateandrepeatable.And,atanypointinthestresstestingprocess,theinformationisreadilyavailableandsearchable,providingthenecessarytransparencyneeded. Furthermore,moststresstestingsolutionsincludecost-effectivemodelautomation,enablingfinancialorganisationstoimplementandexecutespecificriskmodelsorvariousiterationsofthemwithease.Datacanbepulleddirectlyfromexistingportfoliosintothesystemandriskmodelsexecutedtoaggregatethemtoanydesiredlevelforgranular-levelanalysisandreporting.Throughstresstestingsolutions,financialorganisationscanplanmorestrategicallyanddeliverconsistentfinancialriskreports. Finally,withtheabilitytoperceiverisksearlier,forecastingcanbecarriedoutforportfoliodevelopmentandriskmitigationtodevelopacompany-wideviewofpotentialimpactsoncapital.And,astestscanbeconductedatscale,theresultscanquicklybetranslatedintovaluableandactionableinsightsthatcanbenefitthewholeorganisation. Conclusion Whilestresstestinginriskmanagementisanabsolutenecessity–itneedstobeviewed(andused)asmorethanabox-tickingexercise.Stresstestingsolutionsarenotonlyfundamentaltoolsinafinancialorganisation’sdevelopmentofitsriskmanagementstrategy,butalsotoolsthatcanbeusedtodrivevalueandimproveprocesses. Ratherthansimplyrunningtheorganisationwithinacceptablelevelsofrisk,stresstestingsolutionsneedtobeusedfororganisation-specificstresstestingaswell.Organisation-specificstresstestscanprovideend-to-endvisibilitytoidentifynewopportunitiesandimproveperformanceacrosseverydepartment. Ifyouwanttolearnmoreaboutgoingbeyondgovernment-mandatedstresstestingtogenerategreatervalueforyourorganisation,downloadthewhitepaperElementsofBusiness-DrivenStressTesting.   Recommendedreading Article OnlinepaymentfraudstopshereBillionsofdollarseachyeararelosttoonlinepaymentfraudthroughchannelsthatprovideconvenient–yetvulnerable–waystoshopandbank.Seehowtofightbackandwinwithadvancedanalytics. 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