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Stress testing’s “black box”

Libby Sharman
March 31, 2013
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The recent results of the 2013 CCAR and CapPR tests remind bankers, at institutions of all sizes, the regulatory commitment to and the benefits that can come from stress testing and capital planning. While smaller banks may sufficiently benefit from simpler stress testing models than those utilized in Dodd-Frank compliance, forward-looking forecasts aren’t a new practice for financial institutions.

As pointed out in this article featured in American Banker, a sensitivity analysis of the bank’s balance sheet and income statement is what makes the CAMELS rating plural; the “S” stands for sensitivity to market and interest rate risk. These projections have become commonplace agenda items for ALM committee meetings and part of annual reporting. 

There are, however, a few impediments that will prevent stress tests as required by CCAR from becoming as prevalent as interest rate assessments. Those impediments include

(1) the data required for the analysis,

(2) the complex and at times expensive models, and

(3) robust reporting requirements.

While some financial institutions are scrambling to adjust their policies to reflect the CCAR’s bottom-up requirements, other institutions are starting with a top-down assessment to better understand their current risk level and make plans for the future. The goal with these stress tests is not to “check the box” but to provide risk managers with the information they need.  In the article the author notes, “To break the black box and provide needed transparency, it is necessary to understand position risk – current and planned – at a granular level. The analytical methods, to be useful, must result in actionable business intelligence. To be actionable, the methods and processes must be accurate, auditable, and transparent.”

Read the full article. Or, watch a demo to see how financial institutions are using Sageworks Stress Testing to systematize their stress testing analysis.

About the Author

Libby Sharman

Libby Sharman is a Vice President of Marketing at Abrigo.

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Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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