Stress Testing in the Banking Industry: How to Get it Right

In the wake of the financial crisis, banks are moving to improve their stress-testing procedures radically. Accenture has developed an approach to help them.

Banks spent a great deal of money on their stress-testing capabilities but the recent financial crisis revealed extensive faults in the underlying models used. In response, most banks are focusing even harder on improving stress testing, which remains a vital capability in the drive to manage risk better and ultimately achieve high performance.

The recent financial crisis showed that banks’ stress-testing models were  flawed, creating a crisis in credibility for what remains an important way of managing risk. Most banks are taking steps to improve their stress-testing functions, but much more needs to be done—especially as both the market and regulators continue to press banks for better risk management to protect their balance sheets.

Stress testing should be seen within the wider context of the effort banks put into improving their risk management capabilities. Banks face common challenges including:
 

• Improving risk governance and board oversight.
• Integrating approaches to risk management.
• Enhancing stress testing methodology.
• Changing stress testing processes and operating models.
• Significantly enhancing data and systems.
  Extending reporting functionality.

Almost all banks have put particular emphasis on strengthening their stress-testing capabilities and consider the implementation of an effective and well-integrated stress-testing framework as work-in-progress. It is within this framework that Accenture has developed an approach to assist banks in creating a stress testing framework capable of helping banks meet their evolving needs and enabling them to achieve high performance.

Our approach includes five key components which, in most  cases, are part of the stress testing framework:
 

• Stress Testing Risk Governance and Oversight. Support from the board level is a vital first step in embedding stress testing in the decision-making process.
  
  
• Stress Testing Organizational Design and Processes. Accenture proposes a seven stage process framework.
  
  
• Stress Testing Methodology. The methodology must incorporate both top-down and bottom-up approaches.
  
  
• Stress Testing Data and Systems. The stress-testing platform should adopt a “federated architecture” that allows the scenario execution to be implemented across different risk applications.
  
  
• Stress Testing Reporting. The risk reporting engine should be able to generate reports in a variety of formats and across the different data dimensions stored in the database.

Peter Beardshaw is executive director-Accenture Risk Management. Based in London, he brings more than 15 years of deep experience in delivering target operating models and business process redesign initiatives within the credit risk and capital management areas. His broad experience in investment banking program management and change management, in addition to his technical experience in multiple asset classes across front, middle and back office helps organizations become high-performance businesses.

Takis Sironis is a senior manager-Accenture Risk Management. Based in London, he has over 18 years of deep experience in business and IT transformation in the risk management space for investment and retail banking. His extensive knowledge and technical skills in risk management processes and methodologies and risk technologies helps Sironis drive and implement risk programs, align risk functions to business strategy and bring to market new operating models and risk architectures. With his current focus on capital optimization, stress testing and risk transformation, Sironis guides organizations on their journey to high.