Page 54 - Banking Finance June 2023

INTERVIEW

There is already a vast amount of data available in the public external sentiments and scenarios to their instrument panel
space forbanks to leverage and gather valuable insights into to gain a more accurate picture of internal and external
various aspects such as liquidity risk, credit risk, and market risks applied on near real time internal data. Management
risk. The key here lies in harnessing this data effectively. With actions should be regularly updated and tested against the
all the advanced technologies available today, banks must real time external sentiments and scenarios to avoid
focus on building resilience and driving competitive financial instability and safeguard both their customers and
advantage by harnessing alternative data and converting it the economy.
into meaningful insight.
What is the importance of assessing
For example, alternative data often comes either as
concentration risk and liquidity risk, paired with
aggregated data sets or as a straight data feed, through
stress testing and regulatory readiness?
application programming interfaces (APIs). The alternative
Stress testing has evolved as the primary tool for combining
data obtained through APIs can then be included in any of
the scenarios and stress testing that are part of the bank's Risk Management and Capital & Liquidity Planning and
model risk management. Not only will this intelligent data achieving covalency between CRO, CFO and Treasurer. It is
capture help banks identify potential risks, enhance their important for financial institutions to introduce stress
compliance, and take proactive measures to mitigate future testing in areas where it is not yet in use and improve it in
risks; but can also enable them to reduce losses and improve areas where it is already in use, but the aim is to have an
overall financial performance. integrated stress testing framework across Risk, Finance and
Treasury. Regulators are increasingly highlighting the need
for executive involvement in forward-looking assessment of
How can banks enhance contingency planning
risk through integrated stress testing.
and risk management to future-proof their
A holistic and integrated approach to stress testing is
business?
necessary to inform management actions and enhance
To future-proof their business, it is critical that banks focus
recovery and resolution planning. The stress tests should
on enhancing contingency planning and risk management
include scenarios with different levels of severity but
by identifying actionable management actions for adverse
certainly consider factors such as interest rate decisions,
but plausible scenarios. Scenarios with Correlated risks
concentration risk, deteriorating credit conditions, and
should be tested continuously to ascertain if the agreed
impact on large depositors etc.
management actions are actionable and can be of help to
get the Bank back within the Risk Appetite. Concentrating It is very important for banks to regularly test the severely
on a particular market or investment strategy is not adverse shock scenarios that go beyond those required by
necessarily problematic, the danger arises when the risks financial regulators. These scenarios should include "break
are correlated, meaning they move in the same direction
the bank" events or "living will" events that model a
and the failure of one can trigger a domino effect. convergence of all risks at once.I believe that ongoing
management of risk factors must be frequent,
For instance, commercial lending, leasing, and auto finance
comprehensive, nimble, and aggressive. New ways of
may be vulnerable to investor sentiment, which can lead to
monitoring risks and concentrations along with associated
decreased asset values. Therefore, banks must conduct
management actions should be considered and adopted
scenario planning to gauge the potential volatility of these
where applicable. Financial institutions should take
risks and determine management actions to mitigate them.
advantage of advanced technologies and approaches, such
Traditional dashboard instruments, such as liquidity, capital, as models to simulate liquidity events and customer
and market risk indicators, are not sufficient in providing a sentiment monitoring, to ensure stability, especially in a
comprehensive view of risk. Banks must add more real-time volatile market.

48 | 2023 | JUNE | BANKING FINANCE