Financial Services Advisory

Is your bank changing its stress testing operating model?

Is your bank changing its stress testing operating model in the delivery of 2019 Liquidity Stress Testing?

Last week, the ECB launched the 2019 Liquidity Stress Testing (LiST) and subsequently issued the methodology for completing the exercise. Given the timing, it looks like now is a good opportunity to reflect on learnings from supporting banks through the EBA Stress Testing 2018.

Indeed, the LiST is a much smaller exercise than the EBA ST 2018 given that it only asks for less than 5% of data points and banks can leverage existing supervisory reporting. As a result, it makes logical sense that the LiST would require fewer resources to complete compared to EBA ST 2018. Nonetheless, the ECB will challenge the reported data through a rigorous Quality Assurance (QA) process. Thus ensuring that a strong operating model for delivery is key to successful completion.

Below are some areas where we think banks should focus on:

  1. Project Management/Planning: Strong project management is of paramount importance. Critical to success is a good alignment of internal timelines with sufficient buffers to ECB timelines. It is important that banks dedicate ample time and resources to the LiST delivery in order to ensure the quality of data remitted to the ECB six weeks from the launch date is of high quality.
  2. Internal Control Framework (ICF): Whilst there are similarities with the supervisory reporting and the 2018 SSM Liquidity Exercise, there are also some notable differences. We would urge institutions to consider the importance of defining a strong ICF for the full end-to-end delivery of the LiST.

The ICF will include but not limited to the following:

  • Comprehensive documentation (interpretation, assumptions etc.) to ensure common understanding in approach by all relevant stakeholders
  • Well defined structure with clear roles and responsibilities
  • Robust review process that takes into account for example connectivity and consistency to other regulatory reports e.g. 31 December ALMM, LCR etc.
  • End user controls that facilitates for example auditability and consistency checks
  1. The 3 C’s and Engagement: By its nature, the QA process can be intrusive with very demanding timelines. Thus, early establishment of strong Collaboration, Coordination, Cooperation and Engagement across relevant teams will help ensure that the QA process is not as painful as it could be.

Finally, if in doubt ask questions early to the ECB helpdesk and address Star Portal QA flags as soon as possible.

Is your bank initiating any changes to your delivery model? We would be delighted to hear from you.