CAPITAL PLANNING AND STRESS TESTING FOR FINANCIAL INSTITUTIONS
RC: How are financial institutions balancing the demands of meeting required business objectives, maintaining corporate policies and procedures, while enabling the flexibility needed to comply with the evolving requirements of regulatory stress testing?
Rawal: One important element in building out a robust infrastructure to handle stress testing is linked to the modularity of the final solution. There is no single operating model that suits all needs for an institution as expectations and best practices change over time. As a result, it is important to build some flexibility into the design phase so that it can meet multiple objectives over a longer time horizon.
Ansah: In the current regulatory environment, and with some of the capital planning and stress test requirements like the Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Stress Testing (DFAST), financial institutions over a certain asset threshold are unable to treat striving for business objectives, maintaining corporate policies and procedures and satisfying the evolving requirements of stress testing as mutually exclusive. The essence of regulatory stress tests is to promote strategic behaviour and direction for financial institutions so that they better manage risk and their capital and liquidity positions. The requirements around regulatory stress tests also include having sound entity-level controls to include sound corporate governance and policies and procedures that promote effective challenge to the current and projected state of a financial institution’s balance sheet. A challenge most financial institutions have faced, regardless of asset size, is the integration of the various disparate systems and processes needed to build an effective and dynamic regulatory reporting system that can also prospectively drive strategic decision making.
Jul-Sep 2017 Issue
HSBC
RSM US LLP
SAS