Beyond the numbers. Stress Testing: The Human Capital Specialists MANAGEMENT CONSULTING

Transcription

1 February 2017 Stress Testing: MANAGEMENT CONSULTING Beyond the numbers Stress testing tools are used to inform thinking across the bank and are a fundamental aspect of sound decision making, right from the top of the organisation. HEAD OF TRANSFORMATION & STRESS TESTING, Global Wholesale Investment Bank The Human Capital Specialists

2 Introduction Modern stress-testing regimes are relatively new. Regulators are evolving and refining their supervisory models year-on-year. Simultaneously, banks face the complex challenge of delivering against the current regulatory mandate, in addition to designing and implementing a sustainable and cost-effective stress-testing model for the future. Banks have been performing some form of macroprudential assessment since the mid- 1990s. Therefore, most institutions are relatively adept at executing the technical tests defined by various supervisory bodies. However, until recently, the qualitative aspects of the agenda have been neglected and often overlooked. Duly, supervisory bodies are placing an increasing onus on the quality of institutional approaches to stress-testing. Indeed, the PRA has stated that the identification of qualitative shortcomings will inevitably prompt 'less confidence in the results of stress testing and may set a higher PRA buffer assessment 1. Consequently, the imperative to look beyond the numbers has never been greater. Banking institutions face a complex conundrum: not only must they fulfil annual stress-testing obligations to various multi-jurisdictional supervisory bodies, they must also design and embed a sustainable stress-testing framework from which they can deliver qualitative excellence. Correspondingly, firms must lay the foundations for success by enhancing management and planning practices, optimising flexible and fit-for-purpose operational structures, supported by simplified operational processes, underpinned by multidisciplinary teams of technical, functional and management experts. Leathwaite advocates a pragmatic three-step approach to qualitative enhancement of stress testing operations and long-term strategic and regulatory sustainability. 1 ENHANCE MANAGEMENT AND PLANNING Banks must consider an operationally effective and efficient approach to combat increased focus on qualitative measures, allied to spiralling operational costs associated to stresstesting. Clearly defined programme objectives and governance models, pragmatic project plans, clear communications and robust day-to-day change management disciplines will deliver qualitative enhancements. 2 OPTIMISE OPERATIONAL STRUCTURES Institutions should review the suitability of existing risk identification, measurement and management functions. A holistic approach that considers the impact of macro factors and their role in limiting systemic risk is a prerequisite. Coordinating people, processes and technologies to absorb the plethora of complex multi-jurisdictional requirements is critical to achieving stress-testing efficiency. 3 INVIGORATE TALENT Banking institutions must embrace the importance of human capital and cultural evolution; by optimising existing assets and promoting a culture founded upon transparency, collaboration and challenge. Assembling a cross-functional and multi-disciplinary team that can address the range of quantitative and qualitative challenges presented by stress-testing requirements will enhance control and qualitative outputs. BEYOND THE NUMBERS: 3 STEPS TO QUALITATIVE ENHANCEMENT 1 CP1/15 Assessing capital adequacy under Pillar 2, Bank of England January

3 1. Enhance Management and Planning When surveyed, banking institutions ranked management and planning practices as the most crucial component of successful execution of the stress-testing process. Despite the increasing complexity of obligations, most banks remain confident of their ability to fulfil the technical demands of the process, it is qualitative requirements that present the greatest challenge. Stress-testing regimes are evolving apace locally, regionally and globally. While guidance is maturing, the introduction of qualitative measures has imposed a new dynamic of subjectivity. Furthermore, the onset of the Senior Managers and Certification Regime (SMCR) has mandated increased board and senior management engagement. Consequently, the need for clearer governance, planning and management have become critical components of the stress-test evaluation. Accountability Senior management must demonstrate involvement in, and understanding of, the business processes for which they are accountable. This is not just a requirement of the SMCR, it is an instrumental part of the qualitative component of stresstesting assessments. Portfolio Planning Most banking institutions must apply portfolio management techniques to facilitate the identification of commonalities across multijurisdictional requirements. Subsequent programme plans should leverage these synergies to deliver operational, process and cost efficiencies. Project Management Traditional project management disciplines are fundamental to qualitative effectiveness. Rigorous planning and management practices are proven to enhance qualitative and quantitative outputs, in addition to delivering tangible efficiency gains. Governance Banks must define, embed and evidence co-ordinated governance and reporting structures. A robust and transparent framework will reinforce qualitative measures to supervisors; such as control, accountability and senior management engagement. Communications Institutions must establish effective communications frameworks to ensure transparency, alignment of execution and demonstrate qualitative capabilities. Additionally, the ability to clearly communicate stress test plans and results to supervisors is central to demonstrating operational control and awareness. 5 2

4 2. Optimise Operational Structures As banks seek to establish a framework that meets the demands of their regulators, while satisfying the financial demand of shareholders, they will need to integrate stress-testing operations as a sustainable, value-add component of their operating models. Using a functional operating model to structure operational components and define functional interactions will enhance the operational efficiency of stress-testing regimes and augment efforts to advance qualitative aspects of stress-testing programmes. Stress-testing should be a valuable tool to inform the strategic direction of the business. Boardlevel definition of shareholder, customer and regulator demands. Business objectives should inform model development and, in turn, be informed by stress-test findings. Regulatory requirements, including stress-testing obligations, should play an integral role in strategic objectives and operational implementation. A functional model should drive simplification of stress-testing activities, helping to demonstrate the quality and robustness of internal capabilities. The definition and implementation of an interaction model provides the medium by which inter-dependent components are linked and managed. The ability to define governance and programme structures, allied to articulating stress-test models and processes, are key elements of qualitative stress-test requirements. Governance and accountability must be defined and evidenced. The qualitative value of stress-test data can be enhanced by robust data governance and technical architectures. PROGRAMME STRUCTURE The multi-jurisdictional nature of stress-testing regimes, allied to the global nature of most regulated institutions, dictates that firms must consider implementing truly global programmes. This precipitates myriad challenges. First and foremost, firms must determine whether they should run a centralised, decentralised or federated programme structure. 3

5 3. Invigorate Talent The successful execution of stress-tests; how this information is documented, reported and subsequently leveraged to beneficial effect, is contingent on the knowledge, experience and quality of the people involved. When asked what keeps you awake at night?, most leaders within banking institutions speak of regulatory pressures, data-related shortcomings, outdated systems and processes. Nevertheless, even in the unlikely event of relaxed regulatory requirements or with the onset of revolutionised data models and technology, business processes are only as good as those that design and use them. The intensification of stress testing requirements has resulted in a battle for talent. The stigma attached to a negative test result has coerced banks to monopolise extensive teams of stress-testing experts in an effort to demonstrate intent to address qualitative and quantitative shortcomings. Yet, there remains little evidence to suggest that this approach is effective. A purposeful evolution and deployment of resource is a more pragmatic approach to effective stress-test operations. OPTIMISE ASSETS Organisations should not overlook their existing assets. Many quantitative components of stresstesting requirements demand an innate understanding of the organisation, its functional composition and institutional nuances. While at times latent, this knowledge is abundant and best sourced from within. Identify knowledge gaps & deficiencies Assimilate existing talent Inspire collaboration MANAGE DEMAND Multi-disciplinary teams are integral to the end-toend success of stress testing activities. Qualitative demands, allied to the need for greater operational efficiency, precipitates a need for varied skill sets. In addition to quantitative analysts, experienced programme managers, process analysts and documentation specialists are required. Assemble multidisciplinary teams Optimise resource allocation Assess cyclical demand ENHANCE TRAINING Enhancing training modules will facilitate more effective intraorganisational transition, collaboration and efficiency. Evolved requirements and disciplines must be reflected in training disciplines. Training should drive a cultural evolution, predicated upon challenge, transparency and collaboration. Review skill and training deficiencies Integrate stress-testing specific modules Encourage challenge and transparency EVOLVE CULTURE Arguably, the greatest challenge banks face is that of cultural evolution. Nevertheless, organisations must seek to foster a risk aware culture, that welcomes challenge and embraces change. The ability to demonstrate such cultural traits is a core component of qualitative stress-testing requirements. In turn, firms will engender the trust of regulatory supervisors. Review performance incentives and reward structures Embed a culture of regulatory responsiveness Clearly define cultural objectives and ambition 4

6 Summary Given the evolutionary nature of global stress-testing regimes, it would be imprudent to stipulate a single solution for the various challenges posed. Each business must assess the range of challenges within the context of their own institutional boundaries. Nevertheless, adopting a proactive approach and reviewing core operational tenets of the stress-testing agenda can assist banks to reduce operational costs, reignite growth and achieve a competitive edge. Governance & Accountability: Define where accountability for stress-testing resides: risk, finance or centrally? Data: Optimise and simplify data models to promote accuracy and syndication. Business Model Design: Define and implement a fit-for - purpose model: centralised, decentralised or federated? Role of Stress Testing: Establish whether stress-testing is a strategic asset or simply a mandatory requirement. Multi-jurisdictional Management: Identify synergies between local, regional and global regimes to reduce duplication. Resource Model: Determine and embed the optimal blend of skills, experience and technical knowledge. Leathwaite The Human Capital Specialists At Leathwaite, we believe talented people are at the heart of any successful business. We partner with some of the world s most ambitious and innovative firms to attract the best talent in specialist areas and they choose us because of our unique market insight and relationships. Leathwaite Management Consulting Since our launch in 2015, we are developing a growing reputation with our clients for providing bespoke consulting and project delivery solutions a genuine and cost-effective alternative to more traditional offerings. We have an unparalleled pool and network of proven industry specialists, and are able to deploy teams quickly and flexibly according to client needs. We are working with a number of clients to meet critical and near-term deliverables in relation to stress testing - whilst also helping them to build their medium-longer term capability and self-sufficiency. Contacts Points of contact Should you wish for a follow up discussion on this article or how Should Leathwaite you wish may for be a able follow to assist up discussion you, please on contact: this article or how Leathwaite may be able to assist you, please contact: Andy Gregson Partner andy.gregson@leathwaite.com Jacky Crisp Account Director jacky.crisp@leathwaite.com 5 5