New Research from TowerGroup
Rodney Nelsestuen, Bob McDowall
Financial Strategies & IT Investments
The year 2009 saw the first open public demonstration of risks facing the financial services industry as global regulators required stress testing to a specific set of economic inputs. Standard scenarios driven by regulators are insufficient to any given firm, though. Leading FSIs are establishing or expanding their capabilities for stress testing and weaving it into the fabric of their business decision making. Global differences in stress testing requirements increase the likelihood that test results in one part of the industry will lack coordination with test results in other parts, begging the question of whether anyone has a clear view of systemic risks.
Key Findings:
* The UK Financial Services Authority (FSA) has staked out a leadership position that will make stress testing a core and coordinated part of business planning in financial services institutions (FSIs) in 2010 and beyond.
* US regulators have yet to designate a consistent framework for stress testing, leaving individual FSIs to their own biases as to the types and range of scenarios that should be included.
* The lack of a cohesive approach to stress testing puts US institutions at risk of myopic analysis that could miss systemic events that previously were considered unlikely but now have come to pass.
* Diversity in approaches to stress testing will impede the goal of a cohesive global approach to systemic risk management.
* Stress testing scenarios found in tail risk of statistical probabilities will be fundamental to sound risk management, and FSIs will need to lead not lag in looking at unlikely scenarios.
* Individual firms will have individual stress testing approaches that differ according to their lines of business and the risk inherent in those businesses.
