Designed to test the resilience of UK banks to the effects of potential crises with hypothetical ‘shocks’ and scenarios, stress testing is becoming an increasingly public discussion point across the globe.
Today’s stress test results from the Bank of England emphasise the critical nature of data quality for the financial services industry.
“For the majority of banks, the overall data quality and accuracy of results submitted to the Bank also represented an improvement relative to the 2014 exercise. For those banks that performed best, data submissions contained no material omissions, were accurate and required fewer clarifications.”
In confirming that the most successful banks in their latest exercise had clearly prioritised the accuracy of their submissions, the BoE is corroborating the importance of a bank’s data foundation. Establish solid data integrity and you are giving yourself the confidence to make the right decisions.
Implementing internal stress testing and data governance strategies around new regulations (such as the incoming Fundamental Review of the Trading Book) do not simply stand banks in good stead for completing stress tests successfully, but they set them on the road to improving company-wide processes.
This exercise is, after all, aiming to stabilise the economy against future storms – and as such it cannot be undertaken to merely tick the right boxes.
The BoE – as with all regulators, central banks, committees worldwide – wants to engender systematic changes in the way banks operate to ensure we do not see a repeat of the 2007/2008 crash.
Scope for improvement in regard to data is also specifically outlined for the Traded Risk area.
“While overall data quality was generally improved, there were three areas where banks’ data quality was generally poorer: net interest income, traded risk and structured finance. Given the materiality of net interest income projections, the variability in data quality was notable. In addition, as the Bank highlighted in 2014, methodologies used to support assumptions and modelling decisions were less good than in other areas, such as credit risk, for example.”
As the report goes on to mention, the relative lack of data quality for traded risk compared to 2014 can be put down to changes in the data that is required, moving on from previous use of EBA templates.
This shows an individual renewed data focus from the Bank of England, and, as such, is something banks – in particular those who have performed less impressively this time around – will need to concentrate on in the months and years to come.
By undertaking traded risk scenario work in a centralised risk data system, firms can make vast improvements to their data and documentation and subsequently assist with regulatory submissions.
At Asset Control, our latest developments to AC Risk Data Manager are focused on exactly this – giving users the ability to handle all their risk data efficiently in one central system.
BUILDING STRESS TESTING MODELS USING INTERNAL OR EXTERNAL DATA
To address the vital roles of data governance and stress testing in the financial services industry, Asset Control assembled a panel of data experts to identify major challenges, share best practices, and troubleshoot compliance issues.