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September 22, 2015

Technology gap increases the stress of stress testing

Lack of technology is resulting in longer time taken to complete tasks.

By James Nunns

Technology gaps are limiting the potential benefits of stress tests for banks and financial institutions.

Market turbulence spawned the development of regulatory stress testing; its use has intensified since 2008 as markets continue to struggle.

On the whole, the financial industry is nearing maturity in meeting regulatory requirements, however, gaps in technology and reporting are limiting its benefits.

According to research from the Global Association of Risk Professionals and SAS, found that among practitioners 62% would rate their data management as adequate or strong, while only 49% of managers would rate it the same way.

A similar difference of opinion can be seen for scenario management, with 63% deeming it adequate and strong from the practitioner side, only 52% of managers agreed.

Simon Goldsmith, Head of Risk Solutions at SAS UK & Ireland, said: "We often receive feedback from people in the trenches that management is wearing rose-colored glasses. The result of the survey reflects the opposite – risk practitioners were often more positive than management."

Many organisations find that meeting the demands of regulations in a timely way to be a challenge. While 22% of institutions took less than a week, almost half took one to four weeks and 25% up to eight weeks.

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"But many still struggle to meet the new regulations in a timely and effective way, and work still remains to be done when it comes to streamlining technology and eliminating organisational silos that challenge seamless reporting," said Goldsmith.

Modelling also raises time challenges, almost half require more than six hours to execute a set of stress testing models, only 10% could do it in less than an hour.

The time and effort put into stress testing is resulting in financial institutions wanting to use the results to formulate overall business strategy.

The survey found that companies are starting to make changes in aspects of their business based on the results from stress testing. This includes 77% making changes in their liquidity strategy, the same percentage have increased resources for risk control.

Stress test results are also leading to 63% making changes in operational strategy and 59% modifying competitive strategy.

The report is based on survey results from 389 executives and practitioners that are directly or closely involved in the stress testing process.

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