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GRC Professional : GRC Summer 2012
IN DEPTH 18 GRC Professional • Summer 2012 Under stress Risk managers in Australian banks face a challenging year as the flow-on effects of market woes in Europe make stress tests more important than ever. GRC Professional spoke to four top executives who are tasked with carrying out stress-testing exercises for banks, to find out the processes and challenges involved in this highly complex task. BY ROSLYN ATKINSON IN 1999, A BOOK THAT BECAME A surprising bestseller was called The Worst- Case Scenario Survival Handbook. It included tips on how to survive a shark attack, wrestle an alligator or escape from quicksand. While the average Chief Risk Officer (CRO) at a bank may not have to land a burning plane, they do spend a great deal of time writing their own worst-case scenario handbooks for plausible – albeit extreme – risks. These include fluctuating sharemarkets, big drops in house prices and natural disasters, all of which can significantly impact a bank’s balance sheet. In a worst-case scenario, the bank might be unable to survive. Stress tests give banks the opportunity to prepare for extreme events and plan for mitigating actions. What are stress tests? Stress tests have come a long way in the past few years, thanks to the global financial crisis of 2007 and 2008, which saw many banks overseas that were ‘too big to fail’, actually collapse. George Yau, Chief Financial Officer (CFO) for Rabobank, says the GFC taught risk managers that stress tests needed to be more than box-ticking or number crunching exercises. “A few years back, stress testing was much more heavily focused on the credit and market risks. After the GFC, there is a lot more focus on liquidity,” Yau says. Liquidity includes the bank’s access to funding from wholesale markets and from retail deposits coming from customers. If either of these funding sources significantly slowed down or even ground to a halt, what would be the impact on the bank? “These days the stress testing is a lot more real,” Yau explains. “We use real life scenarios such as a weakness in certain commodity sectors or significant weather changes such as drought or flood, and how that might affect our existing Food and Agricultural portfolio and exposures. We take that very seriously and make it as real as possible and learn from the exercise. “For us, stress testing is a way of getting all our staff prepared for the real event, instead of just saying: “Well, we passed”, and forget about it. We engage key staff from across a whole spectrum of the organisation, including staff from the front office who generate assets and those who generate liabilities; legal; compliance; risk; treasury etc; and even people in the marketing and communication areas because in a crisis situation you need to keep your clients and staff well informed. In a real life situation, you don’t have a crisis in one department, instead you have a crisis that involves and impacts the entire bank. At that point in time you need to mobilise everyone in the bank to address the issue by keeping them well informed and engaged.” Stress testing can occur in many different forms, from daily stress testing on market fluctuations that largely relate to only one trading part of the business, right through to X If you sat down and said what would absolutely drive things nuts, the answer is: it’s a confluence of things.” Darryl Newton CRO, Bank of Queensland
GRC Spring 2011
GRC Autumn 2012