The banks may have passed – but the ‘stress test’ is failing
Without doubt, industry-wide stress testing exercises are an important indicator of banks’ health. In fact we think the testing undertaken in Europe should go much further and would support an annual exercise, as implemented by the US regulators – see our current call for an #international default day.
But meanwhile, without a proper understanding of the context, the results of the latest ECB stress tests are dangerously, deeply misleading.
Good stress testing data, and indeed all risk data, needs to be timely, to enable good decision-making. Unfortunately, the balance sheet data on which the ECB exercise is based is far from timely. The massive 10 month gap between the balance sheet used and the publication date is indefensible, if these results are supposed to offer an accurate view of either current health or future stability.
Both banks and regulators need to raise their game.
- Banks need better risk data aggregation processes to report their results faster and perform their own internal stress tests more efficiently and effectively.
- Regulators need to put greater pressure on banks to report more swiftly, and process and publish the results on a far more timely basis.
Fortunately, the fourteen (no less) BCBS 239 principles give a solid grounding for better risk data aggregation, which will in turn enable faster, more accurate stress testing.
We believe all regulators should push the large, complex banks under their purview to comply with these standards.
Our ‘5 pillars of data management’ approach enables banks to improve internal transparency and efficiency and also be confident of their responses to regulators, by using BCBS 239 to improve organisational models, control frameworks, programme delivery, application architecture and – vitally – their underpinning data architecture.