Reducing the stress of stress-testing

Several major banks across the US have apparently faced criticism during their recent Federal Reserve stress tests. The criticism is said to include everything from data collection to risk measurement.

It is not hard to understand why. Stress testing is still a very immature process under continuing development, with little in the way of established systems. It must also pull in data from a wide variety of sources – both internal and external. There is only one piece of technology that can hope to glue all the pieces together and also stay flexible to respond to the massive waves of change sweeping across the business – the humble spreadsheet.

However, having sweated day and night to produce the relevant stress metrics it is not surprising that the banks have their work thrown back at them. After all, how can they demonstrate appropriate governance over this critical activity if it is just being conducted across a large number of interdependent spreadsheets, with no documentation on data provenance and data manipulation. As with actuaries in the insurance sector, many assumptions must be made on the basis of so-called expert judgement – but if not appropriately justified this can look like cooking the books rather than considered calibration.

The only solution is to turn to enterprise spreadsheet management to track and reconcile data adjustments and data trends. This way stress testers can build resilience and automated documentation around their fast-track spreadsheet systems.

Unfortunately spreadsheet management can’t completely eliminate the stress of stress testing - but it can certainly deliver regulatory confidence in the process, leaving the important discussions to focus on the metrics themselves.