CCR Magazine

With The Committee of European Banking Supervisors set to release the European Stress Testing results today at 5pm London time, Leigh Bates, Head of Financial Services Practice at SAS, comments : 

“Most recently, talk has centred on the banks’ concern that the results of the European stress tests will not be wholly fair due to the lack of consistency in the way each organisation conducts the tests or that the tests will offer meaningful feedback as to how well the selected banks would be in a position to survive real shocks. While this is indeed true, in that the banks undergoing the tests fall under many different jurisdictions and go through different cycles when stress testing, there is an argument that the long term purpose of stress testing has been overlooked.

“While the tests will enable regulators to determine necessary capital ratios, the longer term aim is surely to help ‘futureproof’ the industry. Ultimately, banks need to see for themselves what changes are required in terms of risk management procedure so that they can be confident in their own ability to deal with whatever events the future may hold. All the talk about inconsistency in the assessment at a European level is arguably overlooking the internal issues banks must address individually and which will dictate whether or not a bank will fail.

“The issues in question are not new. Banks have been managing risk and conducting stress tests for years, but the heightened sense of urgency they are now having to work to, along with the more enterprise wide view that is being demanded of them, is exposing flaws in the siloed approach that risk management departments have traditionally taken. Sitting risk management alongside, rather than within each business unit leads to a lack of quality data, which then hinders both operation and performance.

“Banks need to have frameworks in place to ensure they can quickly get an enterprise wide view of not only what happened in the past, but why it happened and how to achieve the best possible outcome when unplanned events occur in the future. Putting such a framework in place to enable this comes with its own challenges, as there are many evolving factors to consider. However, by implementing versatile technology, such as business analytics, it arms decision makers with the facts and analysis they need to confidently tackle issues and optimise the business.

“In light of the events of the last two years, the inconsistencies in data and lack of flexibility that have resulted from this siloed approach can no longer be accepted. Right now the industry might be concerned about how it fairs in this initial round of testing, but in order to succeed in the long term, banks need to see this as less of a one off event and more as the initial step in making risk management a strategic part of the business.”

(Source - SAS Comment)