Enterprise Stress Testing Systems 2015

<p>Stress testing and scenario modeling is the most important function of any financial institution (FI)&nbsp;that wants to survive market shocks and increased regulatory scrutiny. Traditional stress testing failed&nbsp;to spot the last financial crash in 2008 because it was too silo-based, didn’t have management support&nbsp;and wasn’t truly enterprise-wide. FIs didn’t integrate credit, market, liquidity and operational risk,&nbsp;or secondary impacts like reputational risk, into consolidated governance and functional processes.&nbsp;Technology systems didn’t deliver clean data that aligned with finance correlated across multiple risk&nbsp;factors and dimensions, including asset classes, legal entities or business lines.</p>

<p>This is why integrated enterprise-wide stress testing is now a necessity. But Chartis’s latest survey of&nbsp;68 global FIs, and in-depth interviews with 22 senior risk practitioners, show the desired integration&nbsp;still isn’t happening. Siloed processes and systems prevail, and there’s no real faith in the numbers&nbsp;except to satisfy the regulator.</p>

<ul>
<li>95% of respondents identified data quality as a significant challenge. Less than half&nbsp;(45%) have integrated the assumptions and data used in stress testing in credit portfolio&nbsp;management. Only 33% have achieved it in risk strategy and 29% in business planning.&nbsp;Integration tends to be visible within risk silos, not at an enterprise-wide level.</li>
</ul>

<ul>
<li>Only 12% of boardrooms have a “high” involvement in stress testing, with senior&nbsp;executive committee involvement at only 18%. A majority concede a “medium” degree of&nbsp;involvement but this isn’t good enough. Chief risk officers (CROs), an increasingly scarce&nbsp;and expensive resource, need more boardroom support to deliver enterprise stress testing.</li>
</ul>

<ul>
<li>13% said front office stress testing is well integrated, highlighting a disconnect with middle&nbsp;and back office functions. Different risk types, IT, business lines and regions remain siloed,&nbsp;especially at smaller FIs. Business as usual (BAU) internal risk assessments are siloed from&nbsp;enterprise-wide efforts that aren’t joining up the dots as they’re compliance-focused.</li>
</ul>

<ul>
<li>Some financial services (FS) sectors are better than others, with buy-side pension providers&nbsp;and commercial banks, with their longer-term viewpoints and more developed forecasting&nbsp;capabilities, generally ahead of short-term sell-side capital market participants, although&nbsp;they lack real-time reporting systems for collateral and intra-day pricing.</li>
</ul>

<p>Technology support is lacking too, with a majority of FIs still relying on Excel and an evident lack of&nbsp;integration between workflows, risk systems and dashboards. Too often external consultants aggregate&nbsp;data into compliance only spreadsheets that don’t offer additional and longer term business benefits.&nbsp;Few of the surveyed FIs have embedded reverse stress testing into decision-making.</p>

<p>Chartis has identified three key implementation challenges that need to be overcome:</p>

<p><em><strong>1. Methodology:</strong></em> Alignment problems and inconsistency issues between business rules and&nbsp;multiple regulatory requirements still plague FIs, inhibiting integrated enterprise-wide&nbsp;stress testing and opportunity spotting.</p>

<p><em><strong>2. Data and IT infrastructure</strong></em>: Data availability, quality and aggregation are still lacking.&nbsp;Some financial utilities and collateral reporting engines are seeking to address this, but too&nbsp;many don’t have industry buy-in. Besides, individual firms still rely on their own internal&nbsp;departmental risk systems to manage their business while spotting potential threats and&nbsp;rewards. Excel spreadsheets aren’t the way.</p>

<p><em><strong>3. Governance:</strong></em> Poor control procedures, insufficient sustained re-usability and a lack of&nbsp;boardroom support are not delivering the systematic decision-support structures that are&nbsp;needed.</p>

<p>FIs, including insurers and central counterparty (CCP) clearinghouses, must comply with regional&nbsp;implementations of the global rules, such as the US Federal Reserve’s Comprehensive Capital&nbsp;Analysis &amp; Review (CCAR) stipulations under the Dodd-Frank Act Stress Testing (DFAST) rules.&nbsp;They also face the equivalent Bank of England (BoE), Asian and European Central Bank (ECB) stress&nbsp;tests – but compliance shouldn’t be to the detriment of internal business focused risk procedures.&nbsp;These remain siloed and are not delivering the valuable risk / opportunity data they should.</p>

<p><strong>Best practice &amp; technology</strong></p>

<p>This report from Chartis tracks developments in the marketplace, suggests best practice and provides&nbsp;an overview of the available risk technology support systems. The report also looks at the demand&nbsp;side outlining the business challenges and FI landscape, while the supply side element will look at the&nbsp;technology for enterprise stress testing procedures and the vendor landscape.</p>

<p>The technology solutions should be assessed in market segments covering retail / commercial banks,&nbsp;universal banks and capital markets’ sell and buy-side participants, with cross-functionality to be&nbsp;prized, and cross risk category capabilities too. Ideally any software deployed should be able to&nbsp;handle credit, market, liquidity and operational risk, alongside asset liability management (ALM),&nbsp;and insurance risk. The best vendor systems, which may require some bespoke integration assistance,&nbsp;should offer:</p>

<ul>
<li>Multi-business, asset &amp; multi-jurisdictional functionality, allied to automation capabilities.</li>
<li>BAU internal stress testing and external regulatory reporting and connectivity.</li>
<li>Integration capabilities with third party (central bank) and end user (FI) models and&nbsp;analytics.</li>
<li>Merging capabilities to fuse finance and risk data, including macro-economic inputs.</li>
</ul>

<p>Enterprise stress testing should impact business decisions at a high level and on a day-to-day basis,&nbsp;instead of being an isolated compliance activity. Leadership from the top is needed to make this&nbsp;happen, in order to remove silos and ensure a strategic approach that merges disparate processes and&nbsp;structures into an end-to-end stress testing process that is unified under one governance umbrella. It’s&nbsp;still some way off, as FIs instead target short-term compliance tickboxes.</p>

<p>This report uses Chartis’s RiskTech Quadrant^® to explain the structure of the market. The RiskTech&nbsp;Quadrant^® uses a comprehensive methodology of in-depth independent research and a clear scoring&nbsp;system to explain which technology solutions meet an organization’s needs. The RiskTech Quadrant^®&nbsp;does not simply describe one technology solution as the best risk management solution for enterprise&nbsp;stress testing; it has a sophisticated ranking methodology to explain which solutions would be best for&nbsp;buyers, depending on their implementation strategies.</p>

<p>This report covers the leading vendors offering risk management solutions for enterprise stress testing,&nbsp;including Axioma, BearingPoint, BlackRock Solutions, Bloomberg, Broadridge, Calypso, ClusterSeven,&nbsp;FICO, FINCAD, Fiserv, IBM, Markit, Mathworks, Misys, Moody’s Analytics, MSCI, Murex, Numerix,&nbsp;Oracle, Intellect Design Arena, Prometeia, Quantifi, SAP, SAS, SS&amp;C, SunGard, and Wolters Kluwer FS.</p>

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