Eugene Grygo, Chief Content Editor, FTF News
As much as the industry hates them, stress tests to find weaknesses in regulatory compliance are not only a permanent part of the landscape, but they will be getting more difficult, says Cubillas Ding, a research director with the Securities & Investments practice of market research firm Celent.
In his new report, “Stress Testing Solutions 2016, Part 1: Future Architectural Best or Architectural Mess?” Ding points out that regulatory stress testing exercises in Europe, the U.S., the U.K., and elsewhere have been done with “great trepidation and strain,” regardless of what was eventually learned. They have also been carried out with the hope that they will someday be over.
“Banks have scrambled to get their annual submissions up to speed and are making big strides. However, these have been achieved with significant pain and costs,” Ding says. In the new report, he reviews the future of stress testing options that may help ease the pain over the coming years.
So, despite the progress made by financial services institutions to keep up with the hell of stress tests, Ding writes that he expects regulatory stress testing regimes “globally to continue to evolve toward tests that will become more difficult each year.”
In large part, this is because regulators are “continuing to ratchet up expectations around the process and its sub-components,” Ding adds. “The underlying paradigm is one of ‘looking under the hood’ of the stress testing machinery to ensure that its underpinnings are sound.”
If the recent past is a guide, financial services firms that strive to be on the “frontier of firm-wide stress testing activities have undergone several waves of change” have had to keep up with the evolution of “operational and technology capabilities to deliver to regulatory submissions, streamline stress testing production activities, and assimilate its implications on broader budgeting and planning processes,” Ding says.
But the ride is not over.
“We believe firms still have to reassess the choices that they have made, or perhaps fallen into, through historical decisions,” Ding says. “Institutions will need to make new choices in order to support requirements for a more sustainable operating model enabled by stronger architectural cohesiveness.”
Some of the things that will need to happen are:
- Firms must normalize stress testing activities on a business-as-usual basis;
- Firms should have architectural foundations that can support future value-added capabilities;
- And firms need to ask as processes and infrastructures are being constructed: “Is our risk and stress testing infrastructure fit for purpose merely to address compliance requirements, or does it need to do more to help us budget, plan, and optimize our balance sheet in a dynamic manner?”
The Celent report is the first installment of a series that will “explore emerging architectures, operating models, and solutions” to help firms deal with stress testing capabilities for the longer term, Ding says.
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