Stress-testing is now mandatory

PUBLISHED : Saturday, 06 November, 2010, 12:00am
UPDATED : Saturday, 06 November, 2010, 12:00am

Peter Lam will spend a fair part of the conference on 'Basel III: New Rules for Bankers', discussing the need for stress-testing in financial institutions.

His expertise comes from advising a host of big banks and from recent dealings with Britain's Financial Services Authority (FSA), as he helped to steer RBS and Lloyd's through the worst of the crisis.

'We will certainly talk about best practices in stress-testing and remind people that this is no longer optional,' says Lam, who is director of risk management for KPMG in Hong Kong.

Because of the financial crisis, he points out, regulators and board members require institutions to run formal stress-testing as part of their strategies for capital planning and liquidity management.

This makes it essential to have an integrated bank-wide approach and, where necessary, to apply reverse stress-testing, and check internal procedures and systems from different angles and probe for weaknesses.

'Understanding the possible implications is a vital step to sound risk management,' Lam says.

He adds that there is still a debate on how reliable the recommended practices really are for identifying and analysing risks.

Indeed, some would argue - looking back to the events of 2008 and their origins - that simply following an agreed set of procedures is no guarantee of spotting potential hazard.

Lam hopes, though, that different ideas and viewpoints will lead to a dynamic exchange during this session of the conference, with participants being encouraged to jump in with relevant questions.

He notes that no one expects Basel III to provide all the answers to the problems that have afflicted the world of banking over the past couple of years. However, it does represent a significant step forward.

'Basically, Basel III is a set of rules and handbooks for banks; some things will not fundamentally change,' he says. 'People will still take risks and come up with new financial instruments, but it is a good starting point to address the loopholes and will give a framework for management to work in a more risk-oriented way.'