Stress testing European banks: Lessons for risk managers
Abstract
Stress tests are an increasingly important component of the risk management and supervisory landscape. The objectives, processes and outcomes can, by design, differ between financial institutions’ own stress tests and supervisory stress tests. But there are vital lessons that can be shared. Drawing on experience of the 2014 EU-wide stress test for the EBA, the authors identify some core lessons from the supervisory world that should resonate with risk managers trying to integrate stress testing into a coherent risk management framework across their institutions. For the purposes of simplicity they group these lessons into: governance, including communication upwards; data infrastructure and integrating stress tests into a broader risk management framework. This paper does not intend to offer detailed solutions. Rather, it aims to draw parallels between the supervisory and risk management world, to identify some common challenges and provide some insight into the experience so far in dealing with these challenges. More importantly, this paper invites further consideration and insight into how these challenges might be faced in the future.
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Author's Biography
Piers Haben is the director of oversight at the European Banking Authority (EBA). Piers is responsible for the EBA’s work on EU-wide stress testing and risk assessments, the efficient functioning of colleges of supervisors and forging a common supervisory culture, as well as common supervisory reporting and transparency. Prior to joining the EBA, Piers worked for the UK Financial Services Authority where he held a number of roles in prudential policy and supervision, including leading the FSA’s policy work on stress testing and the supervisory review of firms under Pillar 2. Piers has widespread international experience including as a member of the Basel Committee’s Supervision and Implementation Group, work in the Financial Stability Forum and advising the South African Reserve Bank.
Benjamin Friedrich is a bank sector analyst in the risk analysis unit of the European Banking Authority (EBA). Within the risk analysis unit he focuses on stress testing and macroprudential policy measures, and was involved in the 2014 EU-wide stress test. He also represents the EBA on a number of international working groups in these areas. Prior to joining the EBA he worked for 10 years as a risk management consultant for the Boston Consulting Group and Oliver Wyman Financial Services. He holds a Master of Science degree in mathematical finance from Oxford University and degrees in mathematics and economics.
Citation
Haben, Piers and Friedrich, Benjamin (2015, July 1). Stress testing European banks: Lessons for risk managers. In the Journal of Risk Management in Financial Institutions, Volume 8, Issue 3. https://doi.org/10.69554/WCCK7909.
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