Bitter pill or miracle drug
Stress testing, initially envisaged as a mechanism to assess capital shortfalls in the aftermath of the Global Financial Crisis, has now positioned itself as one of the strongest diagnostic instruments in the regulatory toolkit. Increasing emphasis placed on reporting and the supervisory review process has reduced opacity and instilled confidence in financial sectors across the globe.
While sheer complexity can make the exercise seem like a daunting task, stress testing also presents institutions with the opportunity to gain a clearer understanding of their vulnerabilities. Banks that successfully take advantage of investments in regulatory compliance to develop robust internal stress testing frameworks will be best positioned to strike the optimum balance between risk and reward.