Stress testing European banks: Lessons for risk managers

Stress tests are an increasingly important component of the risk management and supervisory landscape. The objectives, processes and outcomes can, by design, differ between financial institutions’ own stress tests and supervisory stress tests. But there are vital lessons that can be shared. Drawing on experience of the 2014 EU-wide stress test for the EBA, the authors identify some core lessons from the supervisory world that should resonate with risk managers trying to integrate stress testing into a coherent risk management framework across their institutions. For the purposes of simplicity they group these lessons into: governance, including communication upwards; data infrastructure and integrating stress tests into a broader risk management framework. This paper does not intend to offer detailed solutions. Rather, it aims to draw parallels between the supervisory and risk management world, to identify some common challenges and provide some insight into the experience so far in dealing with these challenges. More importantly, this paper invites further consideration and insight into how these challenges might be faced in the future.