Stress testing and scenario modeling is the most important function of any financial institution (FI) that wants to survive market shocks and increased regulatory scrutiny. Traditional stress testing failed to spot the last financial crash in 2008 because it was too silo-based, didn’t have management support and wasn’t truly enterprise-wide. FIs didn’t integrate credit, market, liquidity and operational risk, or secondary impacts like reputational risk, into consolidated governance and functional processes. Technology systems didn’t deliver clean data that aligned with finance correlated across multiple risk factors and dimensions, including asset classes, legal entities or business lines.
This is why integrated enterprise-wide stress testing is now a necessity. But Chartis’s latest survey of 68 global FIs, and in-depth interviews with 22 senior risk practitioners, show the desired integration still isn’t happening. Siloed processes and systems prevail, and there’s no real faith in the numbers except to satisfy the regulator.
- Data quality is identified as a significant challenge.
- Less than half have integrated the assumptions and data used in stress testing in credit portfolio management.
- Only a small percentage of boardrooms have a “high” involvement in stress testing.
- Very few said front office stress testing is well integrated, highlighting a disconnect with middle and back office functions.
Technology support is lacking too, with a majority of FIs still relying on Excel and an evident lack of integration between workflows, risk systems and dashboards.
Chartis has identified three key implementation challenges that need to be overcome:
1. Methodology: Alignment problems and inconsistency issues between business rules and multiple regulatory requirements still plague FIs, inhibiting integrated enterprise-wide stress testing and opportunity spotting.
2. Data and IT infrastructure: Data availability, quality and aggregation are still lacking. Some financial utilities and collateral reporting engines are seeking to address this, but too many don’t have industry buy-in. Besides, individual firms still rely on their own internal departmental risk systems to manage their business while spotting potential threats and rewards. Excel spreadsheets aren’t the way.
3. Governance: Poor control procedures, insufficient sustained re-usability and a lack of boardroom support are not delivering the systematic decision-support structures that are needed.
FIs, including insurers and central counterparty (CCP) clearing houses, must comply with regional implementations of the global rules, such as the US Federal Reserve’s Comprehensive Capital Analysis & Review (CCAR) stipulations under the Dodd-Frank Act Stress Testing (DFAST) rules. They also face the equivalent Bank of England (BoE), Asian and European Central Bank (ECB) stress tests – but compliance shouldn’t be to the detriment of internal business focused risk procedures. These remain siloed and are not delivering the valuable risk / opportunity data they should.
This report from Chartis provides an independent evaluation and description of leading practices from Moody’s Analytics as well as its competitive position in the market using the Chartis RiskTech Quadrant® for enterprise stress testings systems for financial services.
This report also includes a brief look at:
- The demand side trends outlining key business and regulatory challenges.
- The supply side focusing on the technology landscape for enterprise stress testing.
The RiskTech Quadrant® uses a comprehensive methodology of in-depth independent research and a clear scoring system to explain which technology solutions meet an organization’s needs. Chartis considers Moody’s Analytics to be one of the leading vendors of enterprise stress testing systems for the financial services industry.