EU-wide stress testing: Can you leverage your 2014 project?

AxiomSL | EU-wide stress testing: Can you leverage your 2014 project?

July 31, 2015 – By Thierry Haensenberger, Luxembourg Entity Manager and SVP Business Development

Last year’s European Union (EU) stress test and asset quality review (AQR) created many data management challenges for the 130 banks in its scope, which had to scramble to find all of the data requested by the European Central Bank Inside View - EU-wide stress testing: Can you leverage your 2014 project?(ECB). Following confirmation this month that the next EU-wide stress test will take place in 2016, many of these banks have been confronted by the reality that they have no systematic record of the hard work they did in 2014 and will therefore start next year’s exercise from scratch.

As part of the 2014 EU-wide stress test and AQR, banks received a series of ad-hoc reporting requests, and the final reporting templates were published late in the day, leaving banks little time to prepare. As a result, most firms took a manual approach to compliance, employing large teams of external consultants. This was enough to get them over the line. However, all of the knowledge and expertise they built up was dispersed when the consultants moved on to other projects.

This situation underlines the importance of using a flexible data management and reporting platform that can accommodate ad-hoc data requests, while continuing to support ongoing, regular disclosure requirements. Banks that used a flexible data management and reporting tool in 2014 will have all of the data sourcing, enrichment, reconciliation and processing logic saved within it. Rather than starting the 2016 exercise from scratch, they will be able to modify their 2014 logic, giving them a valuable head start.

Those that used a strategic data management and reporting platform for the 2014 EU-stress test and AQR will also be in a better position to prepare for the 2016 exercise because, while waiting for the ECB to finalize its requirements, they will be able to run their 2015 data through the logic they used last year. This will highlight any issues that may emerge during the real exercise in 2016 and will give firms time to address them before they produce their final results.

Lastly, firms that use a data management and reporting platform to run the 2016 exercise will see important benefits after they have produced their results. In particular, it will make it easier for them to explain any differences that may exist between their 2014 and 2016 results, because they will have access to the data and logic they used on both occasions. They will even be able to run both sets of data through the logic they used in both years to explore variations in the results.

Most reporting platforms do not have the flexibility needed to react quickly to ad-hoc reporting request, and lack the data management features necessary to source and prepare the data required. In many cases, when the final disclosure requirements are published, weeks and even months are needed to undertake a complete software update of the platform (including full regression testing) before it is ready to generate the prescribed reports. This means the platform is completely incapable of managing ad-hoc reporting requests, which usually need to be fulfilled in a few months.

In order to enjoy the benefits I described above, firms need to use a data management and reporting platform that can adapt quickly to change. This will be possible if the platform’s regulatory-specific functionality (including individual reporting templates) is separate from its core functionality. This will mean banks do not need to spend valuable time undertaking a complete software update and full regression testing in order to accommodate a regulatory change. By using a platform that does not impose software updates in this way, banks will be able to implement the ECB’s final requirements quickly and take the sting out of the stress testing exercise in 2016.