Being stressed is good for you

Increased regulatory focus means stress testing can no longer play a minor role in banks’ strategic thinking and capital considerations. Many institutions require cultural and procedural change to make this happen, but are they capable of bringing it about? By Jonathan Hawkins

Maarten Gelderman, De Nederlandsche Bank

The financial crisis highlighted numerous failings in risk management. Regulators argue that senior management was over-reliant on certain metrics such as value-at-risk, and failed to appreciate the limitations of the approach - specifically, that it did not capture low probability but high-impact events at the tail of the distribution. Banks are now being pushed to address this blind spot by making better use of qualitative measures such as stress tests and scenario analysis - techniques that