Introduction:
Since risk management has been formalized within Basel Accords, stress-testing has invariably been an after-thought. It has been hijacked by the accrued necessity to watch liquidity risk, therefore inducing banks into forgetting that stress-testing is, at any time, a good managerial practice. Most banks undergoing a real-life stress scenario reveal that their preparation, if any, was insufficient or at best optimistic, weaknesses have been put to light, and lessons have been learnt the hard and costly way.
Attracting qualified managers and employees (fit and proper for the job) is the most important component of any Basel III stress testing strategy. Stress testing frameworks must include an effective governance structure that is clear, comprehensive, and documented.
This should specify the roles and responsibilities of senior management, oversight bodies and those responsible for the ongoing operation of the stress testing framework.
Roles and responsibilities should be specified for all aspects of the stress testing framework, including scenario development and approval, model development and validation, reporting and challenge of results and the use of stress test outputs. The roles of the second and third lines of defense should be specified (e.g., risk management and compliance, and internal audit, respectively).
The stress testing framework should also ensure collaboration of all necessary stakeholders and the appropriate communication to stakeholders of the stress testing assumptions, methodologies, scenarios, and results. The engagement structure should facilitate credible challenge of the stress testing framework, both at senior and technical expert levels, including not only assumptions, methodologies, scenarios, and results, but also the assessment of its ongoing performance and effectiveness, and the remediation of gaps identified by key stakeholders.
Course Objectives
By the end of the course, participants will be able to: