There are five key considerations for the “next generation” of financial stress testing, said Tom Kimner, Head of Americas Risk Practice & Global Risk Products at SAS. He was addressing a webinar audience on May 7, 2013 as the second speaker in a panel organized by the Global Association of Risk Professionals (GARP). Modern stress testing must be measured against the key considerations of performance, efficiency, completeness, transparency, and compliance.
The goal of turning stress testing into an “early warning system seemed futuristic only a few years ago,” admitted Kimner at the outset of his talk. He contrasted the world of stress testing before and after the financial crisis of 2007-08. In 2005, stress testing was limited to interest rate and equity shocks. “Even in 2007-8, when liquidity risk was a key driver in market decline, it simply was not present in many types of stress testing.”
Earlier forms of stress testing, said Kimner, suffered from major structural weaknesses. There was insufficient ability to identify correlated tail exposure. The widespread use of historical statistical relationships gave misleading results. These were but two of several criticisms contained in the Principles for sound stress testing practices and supervision paper issued in May 2009 by the Basel Committee on Banking Supervision that looked at systemic shortcomings world-wide.
Now there is a “new world” of complexity, speed and execution, said Kimner. The impact of “big data” continues to be felt. Big data, which he defined as data whose volume, velocity and variety exceed the organization’s capacity to properly deal with it, “has been around for a long time.”
Kimner outlined the SAS approach to stress testing. Data can be imported from both internal and external sources, with pricing models and reference data being used to process the internal data. “In-memory computing leads to high performance today,” he noted, “including event-stream processing that was previously cost-prohibitive.” External and internal data feed into “high performance risk” calculations.
“Now companies are building from the ground up,” Kimner said, referring to the IT infrastructure. At the ground level is information; next level is computation; and at the highest level is visualization. Visualization includes drill-down capability to a very granular level, such as to asset class.
At this point Kimner showed “The Next Generation” slide: a complex schematic of an early warning system. It is the vision that underlies the latest efforts in financial stress testing. ª
The webinar presentation slides can be found at: http://event.on24.com/r.htm?e=589921&s=1&k=E97E15429FDDEE0BCCFB9C7357942060
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