UK PRA Raises The Bar On Stress Testing
The UK’s Prudential Regulatory Authority’s (PRA) Model Risk Management Principles For Stress Testing (SS3/18), which took effect on 01 June 2018, raises the bar for many institutions in the way that they undertake model risk management practices when using stress test models.
As institutions step up their efforts to meet these latest stress testing standards, they need to carefully consider their approach to their organizations’ use of spreadsheets. Unless there is transparency and control instituted in how a bank’s spreadsheet-based stress testing models are updated, embedding the PRA’s Model Risk Management principles will prove difficult for banks and building societies.
Banks are required to implement these principles as ‘business-as-usual’, and demonstrate it to management, auditors and regulators alike. Its implementation also forms part of the Senior Management Regime, as it is the responsibility of senior management to implement and oversee its provisions.
Where institutions utilize spreadsheets in their stress testing models, applying automated spreadsheet management capabilities can help them to adhere to the PRA’s principles by undertaking inventory management, model development and implementation, model governance, and model validation and independent review.
In adopting this approach, banks and building societies will be able to capture the stress testing principles of the PRA, whilst maintaining the flexibility the business requires from spreadsheets and delivering the transparency required by management and regulator alike. An automated approach to spreadsheet model risk management and governance will provide institutions an audit trail to demonstrate the provenance, and ensure accuracy, transparency and integrity of reporting information.