Are banks essentially going to internalize the government’s stress tests?
So some changes are needed. These include making stress-test models more factor-based—meaning taking into account outside market factors that hit multiple risks and multiple business units—having better linkages across risk, and defining the scenarios so they reflect changing market composition and business strategy. Also, stress testing will be just one of a number of risk measurement tools. The mantra going ahead will be “multiple views of risk measurement.” The mistake is overreliance on one tool, be it value at risk, stress testing, or concentration risk. It’s not that that one tool is the problem, it’s the over-reliance on one tool that may create blind spots in your risk measurement perspective. From what you say, it seems that risk management, for all its technical aspects, is as much art as science…. Prybylski: The way I would phrase that is, the risk management process, framework, and tools should support a firm’s risk return decisionmaking. To inform those decisions you need
