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Deloitte guides banks on challenges of ‘stress testing’

The Central Bank of Kuwait enhances risk management of banking sector

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The global financial crisis brought many lessons that are now hot topics to the regulators, one of which being the importance of a sound risk management framework for financial institutions. The Central Bank of Kuwait has taken the initiative, similar to a number of other global financial regulators, to introduce stress testing for banks in a bid to strengthen the sector’s risk management. However, for local banks this mandatory half-yearly assessment poses a number of challenges. To address these challenges, Deloitte has organized a banking sector meeting and lunch in Kuwait to focus on this relatively new topic.

“In line with Basel II requirements, banks already had a long to do list in order to become Basel II compliant and many of these initiatives are still in progress. Integrated stress testing is a new risk management technique that comes on top of the existing activities,” said Eelco Schnezler, director of Enterprise Risk Services of Deloitte in the Netherlands. A stress test is a risk management technique used to evaluate the potential effects on a bank’s financial position in a number of exceptional but plausible stress scenarios. Eelco Schnezler and   Rami Wadie, a principal at Deloitte Enterprise Risk Services in the Middle East, jointly facilitated the presentation on stress testing to attendees from Kuwait’s banking sector.

“Although the risk management department of most banks  already has a heavy agenda of projects in progress, as well as a busy schedule in pursuing risks and monitoring the consequences of the global crisis, attention to enhancement of risk monitoring is still needed,” said Rami Wadie. “Traditional methodology, tooling and concepts (such as rating models) have proven their inadequacy to restrain stressed markets. As such, stress testing will become an important part of the risk mitigation activities a bank has to perform. Indeed, stress testing is expected to be one of the major risk topics to observe in the coming year, following the testing of US banks and the recently announced EU stress test”.

“In stress testing, the risk department has to fulfill a different role. Instead of being an analyzing and reporting entity for stress testing, their role is geared more towards facilitating and organizing the process,” said Dr. Hans van Leeuwen, Partner, Financial Advisory Services, at Deloitte in the Netherlands.

“Stress testing goes beyond reporting facts and figures, to give importance to incorporating mitigating actions. As a result a bank should be able to demonstrate that it has a tested contingency plan,” said Fadi Sidani, partner in charge for Enterprise Risk Services at Deloitte in the Middle East. Sidani added that strong governance regarding stress testing is crucial in the Middle East as it is across the world, and to achieve this, the involvement of private sector businesses is needed. In terms of governance, a number of challenges should be overcome, including how to define relevant stress test scenarios and the introduction of sound methodologies allowing flexibility and efficiency in the performing of the test.

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Nada Haddad
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Deloitte
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ME Communications Manager
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