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Bank Stress Testing: The Way Forward

Guy Mettrick, Industry Manager, Financial Services
September 14, 2016

What continues to give bank CEOs sleepless nights as they look to rebuild their businesses and restore profitability?

No, it's not Fintech and the Fintech Federation launching at Sibos this month (but good guess).

The answer is...stress testing.

Despite the emerging, technology-driven disruption in the banking sector, it's the regulatory environment that continues to rate highest on the CEO agenda. And, demands are increasing as regulators shift focus to make stress testing an integral part of a bank's capital plan. In my view, these demands call for a digital solution powered by BPM - Business Process Management.

Here's why.

Annual Tests Reveal Distressing Results

Annual stress testing continues to attract significant coverage as the central banks release the results of their reviews. A number of high profile banks have either failed or had to revise submissions to comply.

The complexity and variable nature of stress testing continue to challenge these organisations.

PwC cautions:

"How banks carry out regulatory stress tests is becoming more critical simply because of their power to set capital buffer levels, determine management actions, and restrictdistributions (dividends and employee bonuses)."

International banks have the added complexity of being requiredtoperform these reviews for a number of regulatory authorities in the UK, Europe, and the US.

Keys Areas of Stress Test Focus

In the UK, the seven banks and building societies covered in 2016 stress tests account for approximately80% of the lending stock regulated by the PRA to the UK economy.

For the 2016 test, the PRA's focus was on three key areas:

    • A macroeconomic stress test, spanning a five year timeline to 2020

    • A traded risk stress scenario which is consistent with the content and calibration of the macroeconomic stress scenario

    • A misconduct stress test, which is in addition to the macroeconomic and traded risk stress test

In the U.S., the 2016 results of the Comprehensive Capital Analysis and Review (CCAR), the annual bank stress test administered by the Federal Reserve Board, were announced at the end of June. Of the 33 BHCs, 30 passed with no objections and one (Morgan Stanley) had to resubmit certain elements of their review. Two banks, Deutsche Bank Trust Corporation and Santander Holdings USA Inc had qualitative objections to their stress test reviews.

Looking Ahead, Change is the Rule

Tests vary year-to-year based on what regulators consider to be the major risk factors that could affect financial markets at that time. In addition, internal factors such as changes to a bank's structure, acquisition, or divestment will also change the scope andfocus of these annual reviews. Assessments include the governance and controls used to support the review processes.

Looking ahead, the key challenges for banks performing these stress tests will be how to effectively manage and control their processes whilst at the same time retain the flexibility to be able to change the processes for each new review.

A Stress Test Case Study

One financial institution identified 30 processes and more than10,000 tasks in need of completionfor one of their annual stress tests. Having gone through a number of these reviews, they had mapped their procedures and dependencies but recognised the actual processes were for the most part manual, using tools such as email and Excel to complete.

This meant the complexity managing the annual review and the changes they were required to implement every year were both time consuming and expensive in terms of FTEs.

Furthermore, it was difficult to produce effective metrics relating to the reviews and how they met any SLAs or KPIs. From a compliance perspective, it was difficult to demonstrate management and control of the actual processes being conducted and then perform any test audits once completed.

The organisation knew they needed to address a set of priority issues:

    • The evolving structure of the bank necessitating changes to their review processes

    • The changing requirements of the regulator requiring analysis of different data elements

    • Gaining control of their processes as well as enforcing and reporting on KPIs

    • The contingent nature of some of their data elements

    • Auditability of stress testing procedures

A Solution to Relieve Stress

After an extensive review of systems and solutions, this organisation decided to deploy a digital transformation platform powered by BPM in the cloud.

There were fivemain reasons why this organisation chose the Appian Platform:

    • Speed of deployment was key to meet the deadline for the start of the review period. The first application must be deployed in 12 weeks, leveraging the low-code development environment.

    • Platform flexibility mustallow the bank to automate and change its processes to meet new stress test criteria as needed.

    • The ability of the platform to incorporate ongoing feedback from regulators and use analytics to optimize and support continuous improvements to the business processes.

    • The support for the platform in the cloud to reduce costs and support rapid deployment of new services and applications.

    • The platform functions that give the business the control of the processes, automated KPI management and a full suite of audit and SLA data and reports.

The project will be deployed in a number of phases as the bank looks to continually evolve to optimise efficiency and continually meet the always-changing regulatory environment.

The Role of Technology

One thing is clear. Banking compliance will continue to develop and evolve in the near future as governments and their regulators attempt to address the issues that contributed to the financial crisis.

Regulatory overlap such as Dodd Frank with CCAR and BCBS 239 does occur and will continue to challenge financial institutions as they look to resolve potential conflicts and adhere to the myriad of new regulation.

Whilst the intensity may be growing, the pace of new regulatory change does seem to be slowing. This will allow the banks to take a more strategic view of their businesses, decide in which markets they can profitably operate by delivering high levels of client service, efficient operational processes, and improved understanding and control of their risk and compliance procedures.

Though new technology will not replace the need for a strong capital base, it will give banks and their regulators the ability to better understand, manage, and control the processes by which these tests are conducted. Banks will therefore be in a better position to address the qualitative issues that the regulators consider so important.

The Way Forward

I invite you to learn more about Business Process Management and the role it plays in compliance by downloading our executive perspective, Compliance, The Digital Imperative for Financial Services.

You can get a good industry perspective on Appian's leadership in BPM by reading the recently released Gartner iBPMS Magic Quadrant.

And, I would welcome a discussion as well. Drop me a note at, and we can set a discussion time. Of course, we can plan to meet at Sibosas well!

Guy Mettrick

Practice Leader - Financial Services, Appian