Jo Paisley on financial stress testing:
As each stress test has its own instructions/templates/methodology, banks are in danger of focusing more on template filling than on the risk insights from the stress tests. Accordingly, stress-testing becomes a compliance exercise, rather than a risk management exercise.
The scale of documentation required, and the granularity of projections asked for, is often very high. What’s more, the resources that are spent on these template-filling exercises are then not available for stress-testing for firms’ internal risk management; the regulators, in effect, ‘crowd out’ risk management, with firms then using the regulators’ scenarios rather than designing their own.
Read more here.