IACPM and Oliver Wyman Survey - Perspectives on the Evolving Role of Enterprise-Wide Stress Testing

Since 2009, financial institutions have been rapidly advancing their use of enterprise-wide stress testing to meet increasing regulatory demands and evaluate their capital adequacy. Enterprise-wide stress testing requires a projection of losses conditional on a specific macroeconomic scenario, and has required most banks to develop new methodologies, models, and infrastructure. This has been the main focus of risk management at financial institutions in the years since the financial crisis.

In 2013, the International Association of Credit Portfolio Managers (IACPM) and Oliver Wyman jointly conducted a survey with leading financial institutions around the world focused on the existing and planned uses of enterprise-wide stress testing. The participants include the world’s largest banks and insurance companies across North America, Europe and Asia-Pacific.

This article discusses the state of enterprise-wide stress testing five years after the start of the financial crisis, with a focus on how financial institutions are using this new capability. It begins by reporting on the current role of enterprise-wide stress testing, especially the use banks make of it and the ways they combine it with measures of economic capital. Then, banks’ aspirations for the next generation of stress testing are explored. Finally, this article discusses the key challenges banks face in taking their stress testing capabilities to the next level.

Japanese and Korean language translations are also available. Please send your request to info-fs@oliverwyman.com.