WASHINGTON, DC—September 19, 2014— Jordan Hu addressed business leaders and academics on overall stress test design and its technological integration at a symposium in DC. The Stress Testing Symposium was organized by the Global Social Science Institute and sponsored by Integrated Financial Engineering Group. Mr. Hu was chosen to participate in a panel discussion on stress test policy. As the CEO and founder of RiskVal, a financial engineering company, Mr. Hu has extensive experience in risk valuation, adapting to new market regulations, and creating products to fill market needs. According to event organizers, “stress testing is currently a high priority concern for many financial institutions.” Mr. Hu stated this shift is a direct result to newly enacted portions of the Dodd-Frank Act.
According to Sections 165 and 166 of the Dodd-Frank Act, financial institutions with assets totaling between ten and fifty billion dollars are required to conduct annual self-administered stress tests. Under these rules, stress test results must be publically disclosed each year between June 15 and June 30, starting in 2015. The fundamental idea of stress testing is to run assets under a ‘what-if’ scenario, to satisfy Basel II & III value-at-risk (VaR) capital requirements for both interest rate and credit assets.
Mr. Hu indicated financial institutions have found it difficult to integrate stress testing strategies with regulatory compliance and capital planning. The current banking industry business model is missing: (1) an interface with existing silos for needed data, (2) the environment to run what-if scenarios, (3) proper computation capacity, and (4) result analysis and risk management. Therefore, financial institutions need a stress testing solution that resolves these technology gaps.
In addition, Mr. Hu outlined the stress testing solutions market, which consists of three sectors of solution providers: (1) vender solutions, (2) internal systems, (3) spread sheet utilization. It turned out that only 33% of companies chose to build internal systems because of the costs involved. Aside from this, most do not have sufficient experience in creating risk valuation solutions. About 21% use spreadsheets to perform stress testing, however, this is a tedious process that leaves room for human error. The remaining majority—46%—turn to vendor solutions, which are more efficient and cost sensitive.
“Not only must stress testing solutions be efficient at data management and address the aforementioned gaps in current banking infrastructure, but must also provide a unified data model that can access data across different platforms” states Jordan Hu. The ideal stress testing solution encompasses loan, collateral, financial, and market data as well as risk factors. Creating a unified data management system is the key to streamlining the process. Other important factors include automation, report generation, model integration, and result analysis, all of which would make the process less time consuming for users.
Since Mr. Hu’s company, RiskVal Financial Solutions, specializes in integration and Software as a Service (SaaS), he favors highly scalable and easily integrated platforms. These two factors are crucial in creating seamless and flexible solutions. During his speech, he cited cloud computation as the superior framework due to its high scalability to fit business needs. Another important factor in establishing stress testing solutions is cost.
Mr. Hu stated: “A hosted solution is a cost effective alternative.” Established in-house stress testing solutions are less efficient and costly compared to hosted service provided by vendors because they require:
IT resources to maintain and update the environmentFlexibility to scale up the computation powerAdditional staff resourcesProcessing time spanning from approximately one to four months.
External solution providers, like RiskVal, are experienced in developing solutions that satisfy new government regulations. These providers have resources allocated to new research and development making it cost effective to design new products and solutions. With the June 2015 stress testing deadline for mid-sized banks approaching, companies will have to decide which approach suits their needs best—be it internal, spreadsheet based, or a vendor solution.
For more information please contact:
RiskVal Financial Solutions
Phone: (212) 631-0808