CFO Focus: Stress testing

first_img 4SHARESShareShareSharePrintMailGooglePinterestDiggRedditStumbleuponDeliciousBufferTumblr Examine your financial situation at the limits so you can better understand where you really Jerry ClarkStress testing is not going away – it has been around in one form or another for generations past, and will continue to be part of the financial industry’s future. As technology has evolved, the sophistication and importance of stress testing has evolved with it. Today, stress testing is not just for the largest and most complex institutions. All types and sizes of financial institutions have adopted stress testing as good business practice.It’s important to note that stress testing is not intended to mimic reality. It is about pushing things to the limits so you can better understand your weaknesses or stress points. The results from stress testing are not expected to happen. This is an important point and cannot be stressed (pun intended) enough. We are looking for anything that could cause us an issue so we can address it before it can occur.I’ve waffled back and forth on several things over my career. If income is what most managers care about and understand, why spend so much time and effort on valuation? Do we really need to model gaps, durations and other metrics, or should we just pick one as our focus? And, the age-old question: Should I model flat balance sheets or growth when running ALCO scenarios?My conclusion is that more testing is better. Easy to say, not always easy to do since modeling takes time. But it is important not to be one-dimensional in your analysis. Focusing completely on earnings and nothing else ignores almost all aspects of your embedded risk profile. Sensitivity to changes in interest rates and unrealized price changes could be missed, as well as possible impacts on your liquidity and ability to borrow money. Understanding the broader impact of your future decisions is vital to running an organization effectively and efficiently. continue reading »last_img

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