Value from Business-Driven Stress Testing


Going Beyond Regulatory-Mandated Tests to Achieve True Risk Management

I regularly hear banking customers talk about ‘sweating their assets’ - leveraging their substantial investments in expanded teams of risk analysts, re-engineered processes and new risk systems for Basel II and III compliance – to gain better insights into their business.

In looking at the approaches taken here in Australia, I think it’s fair to say that most organisations recognise that risk management and stress testing – the latter is a topic of particular customer interest this year - are critical to making informed business decisions. There is a lot of valuable data and information available in risk systems that remains untapped by the broader business. On the stress testing front, most banks have only been able to focus on getting the tests across the line - doing much more has proved difficult due to the incredible effort required to coordinate the iterative process of testing across the enterprise’s businesses and systems.

Business Driven Stress Testing

Business Driven Stress Testing

After customers wrapped up stress tests earlier this year, there has been considerable discussion about improving the process through greater automation and moving beyond the regulators’ mandated tests by running additional business-driven scenarios. The goal is to apply the bank’s unique points of view in regards to the forecasted business environment - economic outlook, competitive strategy, capital raising activities and risk appetite for example – to better understand the tradeoffs between opportunity and risk. Many finance and risk practitioners, including myself, see this as the start of a period of greater focus on measuring risk-adjusted performance and making more risk-aware decisions.

In response, several Australian banks are increasing the scope of responsibilities, seniority and overall visibility of the committees and teams responsible for stress testing. This not only satisfies the governance expectations of regulators but will also increase the value derived from the enterprise wide planning process as a result of higher levels of collaboration and integration across strategy, finance and risk functions.

What’s Held Banks Back?

As a testament to the limited role stress testing has played in decision making, I recently reviewed a draft report based on a survey of banks in the US and Europe which highlighted that just 24 percent of respondents acknowledged making changes to their strategic decisions as a result of stress testing.

So why haven’t banks expanded their use of stress testing sooner?

  • Maturity: Many banks are still in learning mode when it comes to stress testing. This doesn’t solely apply to banks as regulatory authorities are also refining their approach based on what we learn from conducting more tests each year.
  • Complexity: Stress testing is no easy task when you consider the number of markets, operating units, products and customer segments served by a typical bank. Getting the required input from scores of people and systems across the enterprise is often characterised as herding cats.
  • Resources: It takes an incredible amount of time, people and resources to complete a round of the mandated stress tests, leaving few resources available for what is often seen as optional business-driven testing. This is compounded by a skill shortage that is only expected to get worse.
  • Data: Systems have been built in silos over many years and integration of the data required for stress testing has proven to be painful. Data quality issues are compounding the problem and has led APRA and global regulators to intervene with guidance and standards such as CPG 235 and BCBS 239.
  • Change: Keeping up with regulatory changes further restricts capacity to move beyond mere compliance. Banks hire staff, change systems, build capabilities and get good at delivery only to find that the requirements have changed.
  • Engagement: Getting boards and management excited about a new business-driven approach will take time. Executives have not found use for the mandated stress tests which tended to focus on systemic risk and overly simplistic models instead of the bank’s unique strategy, plans and economic conditions.

SAS and Stress Testing Automation

Anyone who has spoken with me about stress testing will know that I get excited about sharing how customers are using SAS stress testing capabilities as a modern management tool. We excel in this space and have enjoyed public recognition of our solutions – most recently by AITE, an independent research and advisory firm known for its finance and risk systems expertise. In a crowded field of well-known vendors, AITE rated SAS a stress testing leader and particularly recommended SAS for “banks that want to introduce as much automation to the process as possible and aggressively seek analytic benefits that go well beyond compliance.”

SAS approaches stress testing by providing software and services that help customers across three key areas:

  • Data Management: Our risk-specific data model and datamart ensures consistent use of data and scenarios as a foundational source of truth across banking and trading books. Transaction-level data, bank data and third party data is captured and integrated for modelling across credit risk, market risk, regulatory and economic capital.
  • Modelling: SAS Risk Dimensions, a centralized risk engine, ensures that factor analysis, model execution and outputs are captured in a single location. The engine performs stress tests, including Monte Carlo derived reverse stress tests, at portfolio and enterprise wide levels.
  • Reporting:  SAS provides a wide variety of capabilities for aggregation and producing consolidated, reconciled reporting and analytics at any level of granularity. Customers regularly highlight the superior auditability of SAS reports and the extensive documentation of all changes to critical assets such as data, models and scenarios.

With the right data and enabling software, SAS customers can simulate different environmental conditions to understand their effect on the financial position of their bank. Armed with insights from these tests, they can better deliver sustainable profitability and growth, even in challenging business conditions. The focus on business-driven scenarios couldn’t be timelier as the Australian industry anticipates a squeeze on performance due to higher capital requirements and slower system growth coupled by the accompanying need to further differentiate themselves from competitors.

Learn More

Stress testing for compliance is important and should be completed as efficiently as possible – but it’s not sufficient for true risk management. Banks need business-specific stress tests to make informed business decisions and to successfully walk the tightrope between opportunity and risk. This means extending stress testing processes beyond mere compliance and taking an enterprise approach to risk management.

With SAS, banks automate data management, repetitive tasks and compliance work to free highly skilled team members to focus on the creative and engaging work of strategy, planning and execution. Adoption of this approach will continue as the banking industry continues to increase focus on risk-adjusted performance and risk-influenced decision making.

Learn more about how banks are using comprehensive, enterprise wide stress testing to enable better risk and profitability management in the SAS paper “Comprehensive Stress Testing: A Regulatory and Economic Perspective.”

Download the paper at:


About Author

Larry Roadcap

Larry Roadcap, a financial services industry executive with more than 20 years of experience in Australia and globally, leads SAS Australia and New Zealand's Risk Management solutions business. He originally hails from Virginia and holds degrees from Georgetown University, Columbia Business School and the University of California - Berkeley.

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