Benefits of stress testing at banks | KPMG | BH

Benefits of stress testing at systemically important banks

Benefits of stress testing at banks

Banks that can resolve the challenges of integration will benefit from the value and insight that stress testing brings to business decision-making.

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How are stress test results being used?

Banks recognize the potential value stress testing as a strategic tool for senior management to identify vulnerabilities within the business model. In our survey of 19 SIBs globally, nearly 80% of firms said they use internal stress testing to support business planning. However, there are differences between the way internal stress testing and external (regulatory) stress testing is being leveraged within the business as indicated in the chart below.

Actions taken as a result of stress testing (% of banks agreeing)

With internal stress testing most closely aligned to the capital planning process and the setting of capital buffers we see managers in business planning and product strategy make use of the results to inform high level risk appetite. However, generally the stress testing process is not agile enough to be fully embedded into business decision-making on an ongoing basis.

Challenges to greater integration

Our analysis found a common theme to limited alignment is a lack of time, or ‘business as usual’ pressures between stress tests and business activities. The timing of regulatory stress testing does not match internal planning cycles, in addition, stress testing exercises face resources constraints. As our analysis shows, 67 percent of respondents indicated some alignment with business planning and budgeting, and a full 60 percent said there was no alignment with new product decision-making and pricing.

Centralization or devolution

The barriers to the more widespread integration of stress testing into business decision making can partly be explained by analyzing the manner in which stress testing is conducted. While we have observed a range of approaches and varying degrees of centralization, the majority of institutions coordinate stress testing at the center but with calculations distributed to a wider network.

Additionally, data challenges, potential inconsistencies in approach and a reliance on multiple manual interactions results in a very lengthy enterprise-wide stress test process. While timescales vary, more than half the institutions take three months or more to complete the entire process.

According to our analysis 60 percent of banks plan to move towards greater centralization of the stress testing processes. However this move towards centralization of the execution of stress testing could potentially blur the traditional three lines of defense.

Recommendations

Banks and regulators need to work together to agree the right balance of effort between internal and external stress testing to preserve the value of testing as an internal management tool. We recommend banks document the full end-to-end stress testing process to accurately measure the full costs of delivery in order to identify optimization opportunities.

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