R&C: Could you outline some of the key developments shaping the stress testing environment in recent years? How would you describe the evolution of stress testing as a governance tool in the US and Europe?

Irubétagoyena: Key developments in the stress testing environment in recent years include the dependency between regulatory capital requirement or liquidity requirements with regulatory stress test outcomes, the multiplicity of stress testing frameworks put in place by various regulators, the emergence of Big Data technologies and the introduction of reverse stress testing. Stress testing frameworks still need major enhancements in most US and European institutions in order to become a fully-fledged governance tool. The articulation between budgeting or planning and stress testing remains, in most cases, partial, with stress testing outcomes being seen as either too detailed or too aggregated to be relevant. Few US institutions seem to have achieved leveraging their stress testing frameworks to optimise their planning. Often, stress testing remains experimented as a pure compliance exercise, demanding heavy investments and governance with limited value added for the institution concerned.

Jul-Sep 2018 Issue

BNP Paribas