Who is responsible for stress testing?
Though the term “stress testing” might still cause confusion, more and more examiners and bankers are beginning to accept the practice and embrace the accompanying benefits.
As more institutions implement loan portfolio stress testing, an issue that could cause problems is overarching responsibility. Who in the bank owns stress testing?
This problem can be traced to the inter-departmental coordination required for strategic direction, data collection, analysis and final reporting. A comprehensive stress test could necessitate data or input from an institution’s Board of Directors and executive, finance, risk, credit, modeling/forecasting and capital adequacy teams.
In guidance jointly issued by the Federal Reserve, the OCC and the FDIC in May 2012, regulators explained how an institution’s Board should fit into the process:
Governance over a banking organization’s stress testing framework rests with the banking organization’s board of directors and senior management. As part of their overall responsibilities, a banking organization’s board and senior management should establish a comprehensive, integrated and effective stress testing framework that fits into the broader risk management of the banking organization.
For the actual execution of stress tests, the finance team will be involved for the preparation of the forward looking financial statements, while the risk team might be spearheading the entire effort and charged with collecting data from the credit department. For even larger institutions, vendor management, modeling and capital adequacy teams may be involved with the development of the stress testing model and the changes made as a result of the stress test’s findings.
With that many teams and individuals involved, responsibility can be unclear, obfuscating a process that, on its own, can be confusing. If an institution has encountered problems with stress testing ownership, here are a few suggestions:
• Designate a team or team member that will be responsible for managing the entire stress testing process, and then hold them accountable. Smaller institutions may not be required by regulators to perform this analysis yet, which could cause employees to view these tasks as low-priority.
• At the start, outline in policy the responsibilities that each team will have and by when those responsibilities need to be completed. Aim for process transparency.
• When possible, automate data collection to reduce the number of manual, data transfers between teams.
• Review the entire process and the end of a stress test to identify bottlenecks in the process, which can be mitigating by either reassigning internal responsibilities or bringing in external resources.
If external, stress testing consultants or vendors are utilized, managing those relationships should be a separate and assigned task. As guidance explains, “If a banking organization engages a third party vendor to support some or all of its stress testing activities, there should be appropriate controls in place to ensure that those externally developed systems and processes are sound, applied correctly, and appropriate for the banking organization’s risks, activities, and exposures.”
To read more about the data needed for stress testing, download our whitepaper on Solving Data Challenges of Loan Portfolio Stress Testing.