Resilient Stress Testing Platforms: Top 4 Considerations

“Bank of England May Toughen Stress Tests as Economy Rallies,” claimed the Bloomberg Business headline on 28 July. Deputy Governor Jon Cunliffe explained in a speech that the Bank of England’s approach would be to use stress testing more countercyclically: “Rather than testing every year against a scenario of constant severity, the severity of the test, and the resilience banks need to pass it, would be greater in boom times when credit and risk is building up in the financial system…”.

This is just one example of why the long-established approach to stress testing using primarily Value at Risk (VaR) methodology is quickly drawing to a close. Not only will more complex methodologies be required to answer regulatory reporting requirements, these processes can also help businesses obtain a better handle on risk management by ascertaining any number of systemic shocks, such as commodities turbulence or currency rate declines. Banks now recognise that spreadsheets alone cannot help manage either regulatory requirements or shareholder scrutiny, so new systems must be implemented. This article reviews the considerations that banks should keep in mind when upgrading to resilient stress testing technology covering: silo issues, reconciliation of parallel risk management infrastructure, ability to handle future stress tests, and related computational power.

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