DFAST and The Furious

May 30, 2016 Don Mal

Banks know they have to comply with regulatory stress tests, but automation is key to ensuring they don’t get stressed out in the process.

When the going gets tough, the tough get going . . . but wouldn’t it make more sense to get going before things got really tough?

That may be the simplest (and possibly too sarcastic) way to describe why U.S. regulators insist on banks going through the Dodd-Frank Act Stress Tests (DFAST) and Comprehensive Capital Analysis and Review (CCAR). Given the global recession of a few years back and ongoing economic uncertainty in many parts of the world, the stresses in question are a lot less hypothetical than they once were. If the worst happens, financial institutions have to be prepared. Period.

In early May an expert from The Darling Consulting Group provided an outstanding, if occasionally frightening look at some of the scenarios that DFAST helps banks to avoid on BankingExchange.com. He suggested, however, that the spirit of DFAST and CCAR existed long before the U.S. Federal Reserve made it an obligation:

“Capital planning came into vogue even for banks not hit hard by credit issues, recognizing a new world order was emerging for the unofficial rules around ‘capital adequacy,’” the article said. “Similarly, management at all banks were required to focus energy on upping their game for contingency liquidity planning.”

More Automation, Please

On the other hand, upping your game is not an insignificant effort. This was acknowledged recently by The Center of Financial Professionals, which just held an event, Risk Americas 2016, with two sessions that looked at DFAST and CCAR. Even before the conference began, however, the organization interviewed large financial institutions to get a read on to what extent they find compliance with the stress tests a struggle.

The results of the interviews were not a set of statistics but some overall observations that suggested technology is playing a key role in taking some of the stress out of stress testing:

With many institutions becoming more familiar with the process, there is a shift in focus emerging from not only complying to each individual test, but automating the process to ensure efficiency year round. Institutions should see stress testing as a value adding precaution to gain a better understanding of positions and risks; therefore automating the process seemed to be a top priority for a range of institutions.

This makes total sense. Compliance in an area like this is non-negotiable, but the smartest organizations understand that you can turn such chores into a competitive advantage if you can make them a part of your core strategy.

All institutions should want to improve their ability to analyze data. The end result of an exercise like DFAST should not be a sense of “better safe than sorry.” It should be insight that not only allows you to avoid the worst outcomes but better—aim for the best possible outcomes for your company.

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