Stress Testing 2.0: Better Informed Decisions Through Expanded Scenario-Based Risk Management

Mandated enterprise stress testing – the primary macro-prudential tool that emerged from the 2008 financial crisis – helps regulators address concerns about the state of the banking industry and its impact on the local and global financial system. These regulatory stress tests typically focus on the largest banking institutions and involve a limited set of prescribed downturn scenarios.

Regulatory stress testing requires a significant investment by financial institutions – in technology, skilled people and time. And the stress testing process continues to become even more complex as programs mature and regulatory expectations keep growing.

The question is, what’s the best way to go about stress testing, and what other benefits can banks realize from this investment? Equally important, should you view stress testing primarily as a regulatory compliance tool? Or can banks harness it as a management tool that links corporate planning and risk appetite – and democratizes scenario-based analysis across the institution for faster, better business decisions?

This paper reviews the maturation of regulatory stress test regimes and explores diverse use cases where stress testing (or, more broadly, scenario-based analysis) may provide value beyond regulatory stress testing.