360° Coverage : Banks Need to Improve Their Approach to Stress Tests

10 Updates

Banks Need to Improve Their Approach to Stress Tests

Apr 17 2014, 2:50pm CDT | by

The Dodd-Frank Act (DFA) established the stress tests and Comprehensive Capital Analysis and Review (CCAR) to determine the stability of the banking system.  Since the stress and capital...

Filed under: news

 
 
 

15 weeks ago

Banks Need to Improve Their Approach to Stress Tests

Apr 17 2014, 2:50pm CDT | by

The Dodd-Frank Act (DFA) established the stress tests and Comprehensive Capital Analysis and Review (CCAR) to determine the stability of the banking system.  Since the stress and capital requirements tests were first implemented in 2009, we’ve observed that it has tended to help banks gain a better understanding of their overall risk profiles, better manage risks across lines of business and foster confidence, both among regulators and in the marketplace.

There is little doubt, nearly five years later, that most banks have improved their capital position and their stability along with their profitability.  The key question now is how banks position themselves and execute their business strategy under the new capital structures to drive competitive advantage, improve profitability through innovation and deliver value to the shareholder.

The Federal Reserve, which administers the CCAR process and stress tests, has provided guidelines for banks regarding the uses of excess capital.  The Fed has noted, for example, that dividend payouts are to be conservative and that planned dividend payout ratios above 30 percent of projected after-tax net income “will receive particularly close scrutiny,” as was reported by Forbes.com and others.

As a part of the latest round of CCAR submissions, the Fed expanded the submission universe, now mandating that mid-tier banks also submit stress test results.

For banks of all sizes, perhaps the greatest challenge resulting from CCAR and stress testing is the time and effort it requires for already overburdened leadership across risk and finance – as well as the IT support functions.  As the processes mature and the banks view CCAR as a strategic tool for decisions beyond compliance, they have continued to make investments, developing more robust operating frameworks, applying quantitative forecasting methodologies, updating infrastructure and technology with analytics and data aggregating tools, and fine-tuning execution capabilities.  Many banks are looking for better systems – and better data – to improve their stress testing and capital planning process.  Large banks, in particular, are implementing automation frameworks to support risk modeling and take some of the burden off of their risk and finance officers.

While many banks have invested in point solutions and software, opportunity remains for banks to establish robust frameworks that integrate data, modeling, analytics and reporting capabilities across all lines of business and all geographies.

Looking ahead, there are five elements that will help large and mid-size banks better prepare for the 2015 edition of stress testing and CCAR submission:

  • Strong Governance Framework. In order to maintain stability and consistency across the enterprise and the governance structure, banks will want to focus on regulatory mandates, process, models and technology.  Senior management needs to be involved in driving and implementing a strong end-to-end governance framework across the organization.  The Board of Directors and senior management should be involved early in the preparation process and confirm the final capital plan submission.
  • Risk and Controls Framework. A risk and controls framework helps ensure that the methodologies and business assumptions about the bank’s response to proposed stresses are challenged and validated by people who sit in the driver’s seat, to encourage a candid assessment of the bank’s real vulnerabilities.
  • Taking a proactive approach. Leading banks are increasingly conducting company-wide stress tests to assess institutional resilience in the face of adverse market conditions.  Using new methodologies including forecasting based on pre-provision net revenue (PPNR) models– essentially revenues and non-credit related expenses – these banks integrate stress testing across business areas, asset classes and risk types, including credit, market, liquidity, operational, franchise and regulatory risks.  Banks that adopt these processes are more likely to be well-prepared when presented with specific scenarios from the Federal Reserve Bank.
  • Integrating the flow of data. Banks have much more work to do when it comes to integrating the flow of data that moves in (and out of) various key functions including risk, finance, compliance and operations.  For many banks, this means centralizing resources at the enterprise level and promoting both top-down and bottom up flows of information. In addition to data flows, the banks need to continue their focus on data quality, granularity and frequency by industrializing data layers and establishing a common data framework between risk and finance. Data granularity is essential, as institutions revisit and develop quantitative based forecasted (PPNR) methodologies, as expected by the regulators.
  • Seeing stress testing as a process, not an event. Stress tests have been increasingly leveraged since 2009 and are being used on a growing number of banks; in short, they are most likely here to stay.  Banks would do well to look at stress testing more in terms of a quarterly physical, requiring monitoring and lifestyle changes, rather than as a final exam to be passed and then forgotten.  To take full advantage of CCAR and to drive efficiencies, the organizations should focus on developing an operating model that allows them to integrate the CCAR process into the existing capital planning, forecasting and Basel processes.

Regulatory authorities have found stress testing to be a useful tool to assess the strength of the U.S. financial system.  The banks can take advantage of CCAR and use the process as a strategic tool to develop strategy and manage their business along with their existing internal processes.  A systematic, integrated approach to stress testing allows banks to see where they are vulnerable and where pressure points might emerge in a given distress environment.  Stress testing provides a key diagnostic that can help banks determine whether their capital plans make sense or whether additional steps should be taken to strengthen reserves and increase profitability.

 
Update
10

7 weeks ago

RM47mil KWSG contributions still unclaimed

Jun 9 2014 7:54am CDT | Source: Business Times Malaysia

KUALA LUMPUR: About RM47 million of contributions in the Teachers Provident Fund (KWSG) still remain unclaimed, the Dewan Rakyat was told today. ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
9

7 weeks ago

Gold shop lost almost RM1mil

Jun 9 2014 3:50am CDT | Source: Business Times Malaysia

KANGAR: A gold shop owner lost almost RM1 million after after the safe on in his shop was br ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
8

7 weeks ago

Motion to debate MAS losses in Dewan Rakyat rejected

Jun 9 2014 3:39am CDT | Source: Business Times Malaysia

KUALA LUMPUR: AN emergency motion to debate the losses incurred by Malaysia Airlines last year, amounting to RM1.2 billion was rejecte ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
7

7 weeks ago

MH370 Tragedy: Hisham: RM27.6 mil spent on 1st phase of SAR

Jun 9 2014 2:11am CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia spent some RM27.6 million in its first phase of the search operations for missing Malaysia Airline flight MH370, said Acting Transport Min ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
6

7 weeks ago

9.1m litres of diesel seized in a month

Jun 8 2014 1:11am CDT | Source: Business Times Malaysia

PUTRAJAYA: The Domestic Trade, Cooperatives, and Consumerism ministry has seized some 9.1 million litres of diesel and property worth RM58 million since mounting ‘Operasi Diesel Sel ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
5

7 weeks ago

Girl, 9, awarded RM2.78m compensation for medical negligence

Jun 6 2014 4:56am CDT | Source: Business Times Malaysia

KUALA LUMPUR: A nine-year-old girl who suffered brain damage during her birth at a government hospital was awarded over RM ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
4

8 weeks ago

Malaysia's total trade in April up 12pc

Jun 5 2014 11:52pm CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia's total trade in April 2014 rose by 12 per cent from a year ago to RM123.86 billion due to growing trading activities, International Trade and Industry Minister Datuk Seri Mustapa Moham ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
3

8 weeks ago

Works Ministry to spend RM20m for upgrading works at 50 accident black spots

Jun 4 2014 11:35pm CDT | Source: Business Times Malaysia

JOHOR BARU: The Works Ministry will implement upgrading works at 50 accident prone locations in the country that have been identified this year involvi ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
2

8 weeks ago

Najib launches loan scheme for Ramadan traders

Jun 4 2014 10:24pm CDT | Source: Business Times Malaysia

PUTRAJAYA: Prime Minister Datuk Seri Najib Razak today launches RM45 million Ramadan ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
1

8 weeks ago

Residents bring up objection against Kidex to Suhakam

Jun 4 2014 4:49am CDT | Source: Business Times Malaysia

PETALING JAYA: A group of 20 Petaling Jaya residents held a meeting with the Human Rights Commission of Malaysia (Suhakam) over their objection against the proposed RM2.2 billion Kinrara Dam ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Galaxy that acts as cosmic magnifying glass discovered
Washington, Aug 1 (IANS) Using NASA's Hubble Space Telescope, astronomers have unexpectedly discovered the most distant galaxy that acts as a cosmic magnifying glass.
 
 
Watch your waistline for diabetes risk
London, Aug 1 (IANS) A British health report has warned that adults with a large waistline are five times more likely to develop type 2 diabetes.
 
 
Now SEPA to facilitate euro payments
Brussels, Aug 1 (IANS) The European Commission said Thursday that the Single Euro Payments Area (SEPA) would become fully operational in all euro zone countries from Aug 1, 2014 onwards.
 
 
Ebola outbreak: $100 mn response plan in West Africa
Geneva, Aug 1 (IANS) The director-general of the World Health Organisation (WHO) and presidents of West African countries hit by the Ebola virus outbreak will Friday meet in Guinea to launch a new $100 million response plan.
 
 
 

Latest from the Network

Sindhu joins Thulasi, Kashyap, Srikanth in quarters (Roundup)
Glasgow, Aug 1 (IANS) Indian badminton players had a great day at the Commonwealth Games when Pusarla Venkata Sindhu joined Parupalli Kashyap, Kidambi Srikanth, Rajah Menuri Venkata Gurusaidatt and Puthenpurayil...
Read more on Sport Balla
 
CWG badminton: Sindhu makes it a good day for India
Glasgow, Aug 1 (IANS) India's Pusarla Venkata Sindhu Thursday night joined Parupalli Kashyap, Rajah Menuri Venkata Gurusaidutt and Puthenpurayil Chandrika Thulasi in the quarterfinals of badminton competition at the...
Read more on Sport Balla
 
Why Apple Is Winning The Samsung War
In the past couple of weeks, a lot of new has come out related to Apple and their business success. Especially in relation to Samsung, they have a lot to be happy about.Many people were expecting Apple to take a large...
Read more on Apple Balla
 
Russia Pushing Apple To Release Source Code
Security concerns were recently raised by the Chinese government concerning Apple’s iPhones. They say that Apple’s devices are being used to spy on the State and reveal secrets to the United States government. Days...
Read more on Apple Balla
 
Kelly Rowland's pregnancy was 'a surprise'
Kelly Rowland admits her pregnancy wasn't planned. The 'Motivation' hitmaker, who is expecting a baby boy with husband Tim Witherspoon, was initially shocked to discover the news, but has already chosen a name for their...
Read more on Celebrity Balla
 
Jada Pinkett Smith is still besotted with Will Smith
Jada Pinkett Smith says Will Smith is much more than just her husband. The 42-year-old actress, who has daughter Willow, 13, and son Jaden, 16, with the actor, admits she is ''ecstatic'' about the way their 17-year...
Read more on Celebrity Balla
 
Apple TV Meets Another Delay
Apple TV has been a successful product, although it hasn’t found its place in the market the way that devices like the Roku have. Apple has been working hard to remedy that, including planning a big upgrade that would...
Read more on Apple Balla
 
14 Palestinians killed in Gaza
Gaza, Aug 1 (IANS) At least 14 Palestinians were killed and 29 injured Friday in Israeli airstrikes, hours before the start of a 72-hour ceasefire in the Gaza Strip. According to medical sources, eight Palestinians...
Read more on Politics Balla
 
Continue peace talks: Myanmar president
Yangon, Aug 1 (IANS) Myanmar President U Thein Sein Friday called for efforts to continue peace talks amidst the country's political reform. "Despite different opinions, political groups entertain a shared attitude...
Read more on Politics Balla
 
James Franco: Child of God is 'very dark'
James Franco says 'Child of God' is ''ten times darker'' than 'No Country for Old Men'. The '127 Hours' actor stars in and directs the upcoming film adaptation of Cormac McCarthy's novel of the same name and he's...
Read more on Movie Balla