Banks are noticing that some business benefits come with an
organized plan for collection compliance
according to a stress testing SunGard survey. The stress testing program was
administered to bankers that found the top benefits included more data to make
decisions on capital planning, particularly in mergers and acquisitions.
Bank stress tests are an analysis of simulated economic scenarios that could unfavorably affect banks. These economic scenarios could include a devastating recession or a crisis in the financial markets. The goal of these stress tests is to determine if a bank has enough capital to withstand the impact of these adverse economic situations.
Bank Stress Tests
One of the first bank stress tests began in 2011 and 2013
right around the time of the last recession in the United States. They were the
Comprehensive Capital Analysis and Review Stress Test and the Dodd-Frank Act
Stress Test, respectively.
Bankers who had not yet taken the survey noted that positive future forecasting was a challenge and a risk. Stress testing is helpful because it uncovers weaknesses in the banking system from a perspective of leadership.
The survey included responses from several hundred bankers that noted issues such as risk management and critical capital challenges they will face over the next year to 18 months.
The process of bank stress testing is an annual survey for SunGard to pinpoint challenges, risks, and priorities. One group of executives were concerned about achieving growth, while the second group focused on profitability concerns.
Bankers that were working on growth concentrated on capital allocation and planning. The group focused on profitability worked on model review, operational issues, and regulatory stress testing.
SunGard reminds bankers to consider regulatory compliance when looking at medium and long-term goals to help information daily business decisions. The bankers that completed the regulatory exercises had an advantage over those who did not in that they were able to use the processes to grow their business.
The most valuable benefit for banks that came from the surveys was combining risk preferences with plans for capital that included mergers and acquisitions.
Automation is Key
Stress testing and effective risk management will involve automation, and banks that can automate will have the ability to test more often.
While process automation has its challenges, larger banks with over $50 billion in capital often find automation more difficult because of the number of systems required due to the sheer amount of data to be processed. Many big banks have noted data integration among their most significant challenges. Banks with $10 to $50 billion did not experience these issues.
Some banks use stress testing for capital budgeting and planning and to process future balance sheet amounts along with interest income. Stress testing helps the bank to make better investment strategies while growing their portfolios.
The SunGard study will become a global survey as Europe can benefit from capital stress testing because of liquidity.
Another primary focus for banks is in asset-liability management. ASM is the process of managing and using cash flows and assets to reduce the risk of loss in business. When ASM is well maintained, assets and liabilities make the company more profitable.
In the current market, forecasts show that interest rates will increase, but just as quickly as is being predicted. The Federal Reserve was expected to raise interest rates back in 2015. These rate hikes affected the consumer and commercial loan industry as well as adjustable-rate mortgages.
The practice of banks using stress testing is usually run by a single group controlling analytics and the models. As requirements become more difficult and complicated, banks will have to evolve to expand these tests throughout different departments reaching every part of the organization.