Stress testing: Where next?

Abstract

Since the success of the Supervisory Capital Assessment Program (SCAP), many regulators around the world now use stress testing to assess the resilience of firms, the quality of their management and the stability of the financial system. The demands on firms have risen enormously. For global firms, the challenges of meeting bespoke regulatory requirements are significant. And as the costs rise, banking systems are better capitalised and accounting regimes are changing to become more forward looking, is it time to step back and consider the costs and benefits of stress testing? This paper provides an overview of stress testing from the perspective of someone who was intimately involved in setting up the first UK concurrent stress test and has run global stress testing at a globally significant financial institution. Enormous value can be unlocked from stress testing, particularly in times of crises. But there now needs to be greater focus on stability of requirements and arguably greater harmonisation — or at least coordination — across regimes for firms and regulators to extract maximum value from this powerful tool.