The most important elements of the guidance are the requirement for banks to implement enterprise-wide and reverse stress testing frameworks, since both approaches allow banks to rise above the silos to perform fully integrated stress testing
London, New York, Toronto (PRWEB UK) 17 October 2011
In its recent response to the Federal Banking Regulatory Agencies guidance document, ‘Proposed Guidance on Stress Testing for Banking Organizations with More Than $10 Billion in Total Consolidated Assets’, Algorithmics comments that the greatest challenge for banks will be in rising up out of the risk silos to perform enterprise-wide stress testing. Algorithmics notes that if banks can aggregate their product and counterparty risk they can not only comply, but can also avoid the dangers that come from risk segregation - such as duplication and mismanagement if potential risk diversification and concentration effects are not taken into account.
Dr Mario Onorato, Senior Director of Balance Sheet & Capital Management Solutions at Algorithmics and Honorary Senior Lecturer, Cass Business School in London, said: “It is clear that banks need to move away from their, in the main, siloed approach to risk management. To achieve this, senior management and the board must actively participate in implementing an institution’s enterprise-wide integrated stress testing framework, including scenario selection, and also ensuring that there is a robust stress testing infrastructure with appropriate IT systems and resources in place. In my opinion, the most important elements of the guidance are the requirement for banks to implement enterprise-wide and reverse stress testing frameworks, since both of these approaches will allow banks to rise above the silos to perform fully integrated stress testing.”
Algorithmics’ response focused on:
- Reverse Stress Testing
Few institutions have the technological ability to undertake reverse stress tests and will require significant effort to build and incorporate this into their overall stress testing framework. Banks will need additional clarity on how the Agencies intend to use the results, and the need for consistency with other international regulators.
- Regulatory arbitrage will become a danger. To avoid it, Algorithmics recommends the Agencies should create minimum common scenarios which all organizations will need to incorporate on top of their current stress testing programs.
- Need for stress testing benchmarks
Because stress testing frameworks differ widely between institutions with different activities and contexts, and because local credit conditions vary, Algorithmics recommends that some standard stress coefficients or models should be suggested by the Agencies as a benchmark.
Dr Onorato concluded: “Banking is an international business and it is essential that there is consistency in regulation worldwide if regulatory arbitrage is to be prevented. The Agencies’ proposal differs from Basel and FAS by not acknowledging the need for common supervisory scenarios for banks to report under. It is important for banking organizations to realize that not all banking failures are driven by lack of capital. Operational risks or changes in the market perception of an institution can also cause institutional failure and these factors must also be included in the enterprise stress testing framework.”
For more information about Algorithmics' balance sheet risk management solutions, please visit: http://www.algorithmics.com/EN/solutions/balanceSheet.cfm
For a copy of Algorithmics’ response, please visit: http://www.algorithmics.com/EN/media/pdfs/Algo-SR1107-StressTesting.pdf
For further information please contact:
Heather Smith, Senior Communications Manager, Algorithmics (UK) Ltd
Direct line +44 (0) 20 7392 5820 Mobile +44 (0) 7515 974223
Notes to editors:
Algorithmics is the world's leading provider of risk solutions. Financial organizations from around the world use Algorithmics' software, analytics and advisory services to help them make risk-aware business decisions, maximize shareholder value, and meet regulatory requirements. Supported by a global team of risk experts based in all major financial centers, Algorithmics offers proven, award-winning solutions for market, credit and operational risk, as well as collateral and capital management. Algorithmics is a member of the Fitch Group. http://www.algorithmics.com
Balance Sheet Risk Management enables the measurement and control of risk associated with liquidity, interest rates, and a firm’s full range of assets, liabilities and off-balance-sheet items. Algorithmics’ solution provides decision support unparalleled in the industry – combining a comprehensive view of all key risk drivers and metrics at the enterprise level, and the capability to stress, forecast and optimize over a range of possible changes in portfolios and scenarios – enhancing strategic decision making to optimize growth, profitability and long-term gains in capital value.
Algo Liquidity Risk offers an integrated, comprehensive, scenario-based framework to help banks gain a more accurate picture of liquidity positions firm wide. Designed with advanced functionality for data management, reporting, compliance, and best practice guidelines, Algo Liquidity Risk enables banks to gain a competitive advantage by more effectively managing and maintaining liquidity.
Algo Liquidity Risk offers extensive product coverage, an advanced framework for a variety of behavioral models and multiple liquidity risk analytics, and stochastic scenario-based simulation of future business.
Fitch Group is the parent company of Fitch Ratings, a global ratings agency committed to providing the world's markets with independent, timely and prospective credit opinions. With 49 offices worldwide, Fitch Ratings’ global expertise spans across capital markets in over 150 countries. Fitch Ratings is headquartered in New York and London.
The Fitch Group also includes Fitch Solutions, a distribution channel for Fitch Ratings products and a provider of data, analytics and related services; and Algorithmics, the world's leading provider of enterprise risk solutions.
The Fitch Group is a majority-owned subsidiary of Fimalac, S.A., headquartered in Paris, France.
For additional information, please visit http://www.fitchratings.com http://www.algorithmics.com and http://www.fimalac.com
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