Welcome to the second edition of Risk Perspectives, a Moody’s Analytics publication created for risk-aware professionals. This compilation presents a wide range of views and approaches to stress testing, all with one larger goal in mind – to deliver essential insight to the global financial markets. The intention is to familiarize practitioners with the necessary means to turn insight into action, whether to maintain regulatory compliance, make smarter, risk-aware decisions, or enhance business planning.
While our last edition was more focused on Europe, our second edition will concentrate on the North American market – specifically how financial institutions can leverage the regulations to add value to their business, for regulatory compliance and beyond. Stress tests are now an important component of the supervisory toolbox and are therefore here to stay and evolve. Understanding the key drivers behind the new regulatory framework, and benefiting from the experience curve drawn from various geographies and practical cases, should help financial institutions to properly assess how they will cope with this new context, for both short and long-term horizons.
Given the current market conditions and regulatory pressure, it helps to have a variety of tools and guides to navigate the new terrain. Risk Perspectives offers actionable information and best practices to assist financial professionals with compliance, data management, and infrastructure.
In the Rethinking Stress Testing section, we discuss how banks can view stress testing in a new light in order to fully benefit from their enterprise risk investment. For instance, in the article “Modeling Credit Losses to Meet Stress Testing Requirements,” Anna Krayn and Thomas Day examine the different approaches to meeting stress testing objectives and build a case for a unified approach.
In Regulatory Spotlight, we take a fresh look at the underlying causes and lessons learned so far from the various stress testing exercises, provide an update on regulations, and address how banks can handle key regulatory compliance challenges. We evaluate the “2013 Mid-Cycle Stress Test Disclosures” and their impact on banks’ organizations and discuss the impact of liquidity stress testing programs in “Liquidity Risk Management is a Game Changer.”
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.
In the Principles and Practices section, we highlight effective practices for applying stress testing to your organization and ways to deal with common pitfalls, such as gathering sufficient data or designing meaningful scenarios. In the “A Singular Approach to Applying DFAST and CCAR Scenarios Across Asset Classes” article, we study the challenges of stress testing structured finance portfolios.
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 issues of Risk Perspectives by sharing your feedback and comments on the articles presented in this issue.
Senior Director, Head of Business Development (EMEA)