Welcome to the first edition of Moody’s Analytics Risk Perspectives™, a publication created for risk practitioners. In many ways, it is a reflection of our larger goal – to deliver essential insight to the global financial markets. Practitioners can then turn that insight into action, whether it is to maintain regulatory compliance, make smarter, risk-aware decisions, or enhance their business planning.
In this edition, we focus on stress testing in Europe – specifically how banks can leverage stress testing to add value to their business, for regulatory compliance and beyond.
In the Rethinking Stress Testing section, we discuss how banks can view stress testing in a new light so they may fully reap the benefits of their enterprise risk investment. For instance, in the article ‘Are Regulatory Stress Tests Just Cost without Value?’, we introduce the fact that whilst regulatory compliance is challenging, there are ways in which banks can use stress testing to build long-term value rather than treating it like a check-the-box exercise.
In Regulatory Spotlight, we take a fresh look at the underlying causes and lessons learned so far from the various stress testing exercises in Europe and in the US, provide an update on regulations, and address how banks can handle key regulatory compliance challenges. We evaluate the upcoming European Banking Authority (EBA) stress tests and their impact on banks’ organisations in ‘EU Stress Testing Regulatory Update: What Happens Next?’ and also take a look at the AQR in ‘Asset Quality Review: Setting the Foundation for a Standard Stress Testing Framework’.
The Approaches to Implementation section provides best practices about how to navigate the complexity and uncertainty that still hinders the execution of stress testing and pinpoints key opportunities that banks should embrace. For example, in order to implement a comprehensive, rigorous, and forward-looking stress testing programme, we have created a model, which we detail in the article ‘Stress Testing Best Practices: A Seven Steps Model’.
In the Principles and Practices section, we highlight effective ways for banks to apply stress testing to their organisations and deal with common pitfalls, such as gathering sufficient data or designing meaningful scenarios. In the ‘Stress Testing of Retail Credit Portfolios’ article, we divide the stress testing process for retail portfolios into four steps, focusing on key activities and providing details about how to implement each step.
Again, we hope our perspectives on stress testing will help you attain a better understanding of how to approach and thrive in a world of ongoing regulatory, business, and industry demands. I encourage you to take part in this discussion and help us shape the future editions of Risk Perspectives by sharing your feedback on our first issue.
Senior Director, Head of Business Development (EMEA)