OBRAS COMPLEMENTARIAS ESCALERAS Y CASA DE FUERZA

19 As outlined in Recommendation 27 of A review of corporate governance in UK banks and other financial industry entities (2009) by Sir David Walker.

19 Firms have, at times, viewed scenario selection as a backward-looking exercise. The recent financial crisis has demonstrated the flaws in placing excessive reliance on historical data and experience. Our suggestion to firms is that they should adopt a balanced approach in scenario selection, taking into account historical data and experience, but focus their thinking on forward-looking hypothetical scenarios that cover issues and risks that may not be identified by looking solely at the past and considering how relationships between risk types may behave in future stresses. 20 We require firms to undertake a range of stress testing at various levels of granularity

in their business. It can be valuable for firms to take output from individual business line stress testing and aggregate this to get a detailed firm-wide picture. However, in particular for larger more complex firms, the aggregation of individual business line stress testing results should be treated with a degree of caution. Correlations, offsetting of individual exposures and risk concentrations may not be adequately captured by simple aggregation and there may either be double-counting of risks or underestimation of the impact of a stress scenario.

21 Firm-wide stress testing should be used to identify firm-wide risk concentrations that may exist both on and off-balance sheet and should also serve to highlight interdependencies and correlations of risks in stressed situations.

22 Therefore, consideration of feedback and second-order effects is important, particularly when analysing the system-wide effects of macroeconomic shocks. Although challenging to model, feedback and second-order effects should be considered, at least in a qualitative sense, for mitigating management actions to be credible and feasible.

6. Firms should establish a robust stress testing infrastructure with appropriate IT systems and resources in place. The infrastructure should be periodically reviewed by senior management for its continued effectiveness.

23 Firms should employ IT systems, resources and procedures that would assist them in producing valuable and timely stress testing information in a useable format covering a range of metrics to senior management and other users. This principle should apply to both routine and ad hoc stress testing. High level information on the scope and outcome of the firm’s stress testing programme should be provided in board risk committee or board risk reports that may be included within annual reports and accounts.19The report should include the nature of the stresses used, the most

significant stresses and how the significance has changed during the reporting period. 24 Risk management systems should be flexible, facilitating robust, complete and accurate data gathering across the organisation at firm-wide and more granular levels so that firms have the option to undertake stress testing at varying levels of aggregation on a targeted or ad hoc basis. It is essential that underlying data produced for stress testing purposes is good quality as it is a very important input into the process and may determine how effective a firm’s stress testing is. In firms where inputs from multiple IT systems are in place for stress testing, firms should put in place a robust interface between those systems, which may involve solutions from external vendors or other parties.

25 Senior management should periodically review the effectiveness of the firm’s stress testing infrastructure and should ensure that necessary steps are taken for its ongoing improvement.

7. Firms should have clearly documented policies and procedures to enable effective implementation and maintenance of the stress testing programme, which should be periodically reviewed by senior management.

26 Firms should develop documented policies and procedures for stress testing that are approved by senior management of the firms.

27 These policies and procedures should include the following elements:

• the types of stress testing that the firm will undertake (including those needed to meet regulatory requirements) and the objectives behind them;

• indications of the frequency at which stress testing will be undertaken which will vary depending on the type and purpose of the stress testing. For example, it is likely that stress testing of individual risks will be undertaken on a relatively frequent basis in contrast to firm-wide stress testing that is likely to be done less frequently; • methodologies behind scenario selection including the role of judgement in

this process;

• records of any assumptions adopted in relation to scenario design, the firm’s businesses, data quality and management actions; and

• provisions for management oversight, review and challenge of the stress testing process.

28 Firms should note however that documenting policies and procedures does not prevent the firm from undertaking flexible ad hoc stress testing that may be required in response to emerging risk issues.

29 Senior management should regularly review the policies and procedures in place in light of changes to individual businesses and general economic conditions. They should also include an evaluation of the overall effectiveness of the stress testing programme in meeting its objectives, including how well elements of the programme are

documented. Assistance from internal audit or other independent control functions may be helpful here.

30 We have created a summary table for firms in relation to the stress testing good practices outlined in this annex and wider Policy Statement. This table may be used by firms as a list of specific things they should consider and do as part of their stress and scenario testing processes.

Item

1. Have the Board of Directors and senior management of the firm taken ultimate responsibility for establishing an effective stress testing programme and infrastructure at the firm?

• Do the board and senior management foster a culture within the firm that promotes stress testing as an important risk management tool?

• Has the board and senior management taken ultimate responsibility for establishing the firm’s stress testing programme and supporting infrastructure including provision of sufficient resource and investment?

• Are clear accountabilities and responsibilities for stress and scenario testing assigned to individuals and/or groups within the firm?

2. Are senior management of the firm actively involved and sufficiently engaged in implementation of the stress testing programme?

• Do senior management maintain a degree of involvement and engagement at all stages of the firm’s stress testing process, taking into account the scope and purpose of the stress testing activity being discussed?

• Have review and challenge sessions for senior management and others been established to analyse stress testing output and agree credible mitigating management actions? Firms may consider using risk assessments undertaken by business unit staff as a check and balance for the stress testing output.

Is scenario selection and design a collaborative process in the firm involving representation from senior management, business unit staff, risk management staff and economists that meet on a regular basis to select and design scenarios?

• Are assumptions made and decisions taken regarding scenario selection in these meetings accurately documented and retained within the firm?

• Have the scenarios designed and selected been translated effectively into specific effects on risk parameters and is there a clear process and understanding of how this should be done?

3. Are stress testing outcomes integrated into firm decision-making through senior management, business unit and risk management staff involvement?

• Are the results and information from stress testing presented to senior management and other users regularly in a useful format covering a range of metrics?

• Are stress testing results discussed at relevant forums within the firm that include representation from appropriate staff including senior management as relevant? 4. Does the firm have a stress testing programme covering all relevant levels of its

business, all risk types and over a range of severities?

• Are appropriate stress tests carried out on material risk types and at relevant business levels on a stand-alone basis as well as under the firm-wide stress?

• Are stress tests undertaken over a range of severities including one ‘appropriately severe’ scenario for capital Pillar 2 purposes?

• Does the firm take a proportionate approach to stress testing, taking account of the nature and complexity of the business and the risks that it faces?

Item

5. Is the firm’s stress and scenario testing undertaken on a forward-looking basis, with sufficient use of firm-wide stress testing to help identify risk concentrations, assess interdependencies and understand second-order effects?

• Is there a specific discussion of risk concentrations in firm-wide stress test results? • What assumptions does the firm make in relation to second-order effects and what

analysis is used to support these assumptions?

• Is the firm able to identify and make use of complementarities between the different stress tests undertaken?

• Is the stress testing programme structured to enable senior management to take a comprehensive view of the firm’s risks?

• Where relevant, has aggregation of stress testing outputs within the firm been approached with caution, considering offsetting exposures and correlations of risks? 6. Is there a stress testing infrastructure in place with appropriate IT systems and

resources to carry out effective stress testing?

Is the infrastructure periodically reviewed by senior management for its ongoing effectiveness?

• Are IT and risk management systems producing accurate data across the firm in a useable format for stress testing purposes?

• Is the firm able to present stress testing output in a useable, accessible format to circulate to senior management and other relevant staff?

7. Are clearly documented policies and procedures in place to enable effective implementation and maintenance of the stress testing programme?

Additional guidance to