There's bad stress and there's good stress

As stress tests get tougher, banks are also expected to show big improvements each year. But simply ‘surviving' stress testing is no longer a viable option - traditional banks need to view it as less of an onerous regulatory process, and more as an integrated tool that can drive the business, while challenger banks have a real opportunity to grasp the initiative.

Less reactive, more predictive
In 2014 many banks reacted to stress tests in a piecemeal fashion, using manual and tactical methods to ‘chase' a specific set of risk scenarios. They will now need to develop processes that are highly automated, coordinated across functions and international branches, and to produce more relevant output that allows for a less reactive and more predictive capability.

Strategic decision making
This more centralised and strategic approach will help create a greater understanding of the bank's core risk profile, and in so doing, afford the hierarchy the confidence not just to develop improved financial and capital planning, but to support more robust risk management and high-level business initiatives.

Decisions can then be made that go far beyond tactical adjustments to hedging products and lending limits. They can set risk appetite, assess the viability of new products, and ultimately define the business strategy. Stress testing will then exist not just to identify areas of vulnerability, but to uncover areas of opportunity.

People priority
Of course, creating a ‘good stress' environment - one that embeds stress testing deep into a bank's culture and management - will require many banks to commit to big changes and significant investment, with finding exceptional people a top priority.

EM Group is more than just a high-level executive recruiter. Our dedicated challenger bank team understands the industry, its evolving nature and, of course, its senior people. And we are committed to building trusted client partnerships for the long-term.