Bank stress tests – more employees needed to prepare

In order to properly prepare for the regulatory bank stress tests, banks need to take on more staff, says a new report by PwC titled Passing the stress test.

The report authors carried out a global survey of 24 banks, most of them non-US ones, and discovered that overall, even though participating banks report being confident about meeting current regulatory requirements, they have underestimated the amount of resource required to meet the demands of a more stringent stress testing regime.

Nine in every ten respondents had fewer than 20 employees dedicated purely to bank stress tests.

Comparable banks in the US typically have at least forty people, and some have considerably more. US banks had to take on more people to work on stress tests in response to demands imposed by the Federal Reserve.

Most banks admit they are understaffed

The majority of banks in the survey acknowledged that further investment is needed. Only 13% of them reported already having sufficient, suitably skilled staff to carry out regulatory stress testing, while most of the others cited some gaps in their staff numbers and capabilities.

PwC partner, Keith Ackerman, said:

The way global banks prepare for stress testing needs to change. Past experience has shown that very demanding regulatory stress testing regimes require larger teams with the appropriate skills to deliver value.”

“In order to meet future regulatory demands, banks need to move regulatory stress testing from a standalone process to one that has more resource and is integrated with other parts of the business and its strategy. Banks face a complex challenge in simultaneously managing the delivery of stress tests and improvements to their stress testing processes, made more challenging by the changing regulatory landscape.”

Richard Barfield, a director at PwC, said:

“The way banks carry out regulatory stress tests is becoming more critical, simply because of their power to set capital buffer levels, determine management actions and restrict dividends and employee bonuses. Stress testing sits squarely on the agenda of CEOs.”

“For most banks, stress testing will require sustained focus over a long of time and employing more people dedicated to stress testing will be needed. But the rewards are potentially great as those banks that pass stress tests and don’t lag behind their competitors could achieve a relatively lower capital buffer.”

More engagement by banks’ Board of Directors

The report also found that the board of directors of banks need to become more comprehensively engaged. Most Boards and senior management personnel are closely involved at the results stage, but much less so in the end-to-end process of stress testing.

This lack of comprehensive engagement means they are likely “to fall short of the increasing regulatory requirement for more comprehensive involvement.”

Stress test results could be useful in informing and managing banks. While the respondents agreed that regulatory stress tests are useful for awareness and provide insightful data, 95% of them have either never or rarely revised business plans in response.