How can banks take the pressure out of stress tests?

Last year has been a rocky year for banks and financial markets. 2016 was a year of major fluctuations, driven by political changes across the world. The markets have reflected these turbulent times, with the greatest number of fluctuations the market has seen in 50 years. Banks have to mitigate these risks and adapt to new market changes.

Banks have also been under attack on other fronts as well. With cyber-attacks, increased regulations being imposed and Challenger Banks catching up rapidly, these are causing high-street juggernauts to lose credibility, and create customer churn.

On top of this banks have had to endure stress tests, which are the harshest yet. Stress tests have been called a financial version of a military "war game". It is designed to make sure banks are able to still operate under extremely stressful situations whether it be a housing market slump, a credit crash or a fossil fuel shortage. Stress tests are carried out on an annual basis. Failure of these tests could result in fines, increased legislation and in severe cases the removal of trading licenses.

Last month, the third annual stress test of its kind was conducted, it was based on what would happen to Britain’s biggest lenders if they faced another global recession. This year, some major high-street banks failed the stress test because they were unable to reach the required 7.1pc level demanded to reflect its importance to the financial system. This wasn’t helped by the potential $12bn-plus fine from US authorities over non-compliance.

Banks are under a lot of pressure to make sure they can handle themselves if another recession were to happen. As there is larger pressure on banks to improve their online services and security due to increased access to sensitive information via social networks and smartphones, harsher rules and regulations are being put in place to protect the consumer.

Banks need help. Technology is a huge driver for effective performance in stress tests. New technology results in better data storage and replications for testing, meaning that there is a better allocation of resources to the risk.

Challenger Banks are equipped with newer, more resourceful technology systems that are agile enough to handle future demands from regulators. Traditional banks do not have this luxury and are still grappling with legacy technology, which is too slow to handle today’s data deluge, preventing the necessary data from being produced within the timeline required. The siloed nature of the bank's IT system could prevent all relevant data being accessed for the stress test.

Banks need to consolidate their data, so they can access it quicker and be able to analyse it under time pressure. However, one of the main issues traditional banks face when reacting to such tests is they are often hard-coded and therefore they cannot change their processes in time, whereas the technology used by Challenger Banks is far more agile so they can mitigate problems.

To make sure banks keep up with compliance they will have to embrace new technology to help them sort through the data deluge. This is a great time for bank CIOs to assess the strengths and weaknesses of their IT architecture and ensure they get complete access to data for future stress tests and be able to provide better customer offers. Effective technology is becoming vital for banks to manage their data in order to comply with upcoming regulator demands.

As new tests and regulations are enacted, there is no better time for high-street banks to assess their IT portfolio. With increasing popularity and market demand for Challenger Banks, more regulations will be placed upon them to give assure their customers their hard-earned income will not vanish if a Challenger fails. This could change the future of stress testing, which Challenger Banks will have to be prepared to confront.

The world is still full of uncertainties, which are looking likely to continue growing throughout 2017; the triggering of Article 50 in Europe, the cash crisis in India, rapid debt accumulation in China and increased unrest in Middle East. Banks will need to be prepared for nightmare scenarios to occur at any time, their motto this year should be - hope for the best, but prepare for the worst.