Findings from the survey
- Almost 90% of respondents have fewer than 20 people dedicated to stress tests. This is less than half of what we have seen in comparable US banks – noting that some US banks use significantly more staff.
- The banks in our survey rely on small teams to carry out regulatory stress tests, with the majority of respondents revealing gaps in staff capabilities and numbers.
- 95% have never – or very rarely – revised business plans in response to stress test results. Regulatory stress test results are, however, used by some banks to inform decisions relating to risk appetite and de-risking.
- The majority of banks expect to enhance their stress testing frameworks over the medium term, with data quality and modelling capabilities as top priorities.
- Banks will be expected to model more scenarios, across more portfolios, with more speed, accuracy and strategic buy-in than ever before.
- The resources that CCAR banks dedicate to regulatory stress testing are much greater than the resources that our survey respondents currently have or are planning to acquire
- A further transformation is coming, with the UK and EU authorities set to follow the US in introducing regular, comprehensive stress testing regimes. Other jurisdictions are likely to follow suit.
- It is no longer sufficient for Boards and senior management to review and challenge the final results – more active engagement in scenario design, assumptions, understanding model limitations and formulation of management actions is expected.
- Supervisors also need their own robust systems, enhanced models and data controls to manage and interpret the volumes of data that they receive. They also require additional resources to meet the new standards.
- Banks will have to find a way to enable Boards, (including non-executive directors) and senior management to participate in the end-to-end process in a more pro-active manner.
- Clear evidence of this engagement is likely to be critical in convincing the regulators of the challenge provided and value added by the Board and senior management.
- In the majority of instances, the Chief Risk Officer (CRO) is responsible for the overall stress testing programme
- A close working arrangement between Finance and Risk will be an important feature of more advanced and robust stress testing processes
- For example, the CCAR process conducted in the US is typically completed within 6 months. This is consistent with the envisaged timescale for the UK regime, which is expected to be finalised 7 months after the date of the balance sheet information used as inputs to the stress tests
- Expect regulators to play a much more active role in the final decisions relating to management actions. In particular, the Bank of England will request banks to submit a menu of potential management actions in response to forecasted capital pressures
- In our experience, a more collaborative approach should reduce stress testing delivery risks.
- Most banks also acknowledge front office could play a more meaningful role in the stress testing process
- Banks yet to align stress testing with other relatively new regulatory disciplines, most notably recovery and resolution planning, despite the obvious similarities between these processes
- The majority of banks currently maintain detailed documents that explain the rationale for modelling assumptions
- More specifically, three quarters are able to provide regulators with continuous evidence of management challenges to model assumptions.
- Enhanced model governance will become a key feature of regulatory expectations. More specifically, regulators expect stress testing models to be subjected to the same governance and control as credit risk models.
- Banks are currently reliant on relatively small teams of dedicated resources to conduct regulatory stress tests
- The additional staff is involved in on-going improvement of stress testing processes as well as the execution of the stress tests.
- All respondents indicated the regulatory stress testing process takes between one and four months to complete, with a fairly even split across this range.
- The pressure to meet relatively tight deadlines will be further exacerbated by expectations of greater engagement with Boards and senior management internally and regulators externally
- Respondents cited a range of third-party IT systems used to conduct regulatory stress testing. Many banks, however, do not rely on a specific vendor solution – 33% developed their own internal systems and 21% remain partially or wholly reliant on Excel spreadsheets.
- We suspect reliance on Excel spreadsheets will not be a sustainable solution going forward, particularly for those banks that will have to comply with multiple regulatory regimes,
- Furthermore, we expect weaknesses in data reconciliation or modelling capabilities will be placed under increasing pressure as regulatory stress testing demands intensify.
- It is also expected to benefit the wider controls environment
- Almost half of respondents plan to develop a single process to deal with regulatory stress testing requests
- Model more smartly: enhance modelling capability to achieve a better balance between modelling and data processing and other value adding activities, such as assessing implications and management actions.