Financial forum calls for better stress testing

The Joint Forum has submitted a paper to the Financial Stability Forum calling on financial firms to beef up their stress testing in order to cope with the current market turmoil.

The paper assesses the progress made by financial conglomerates in identifying, measuring and managing risk on a firm-wide basis. The paper also includes observations and lessons drawn from the market turmoil that began in mid-2007.

“Not only do firms need to factor liquidity risk into firm-wide, integrated stress tests but they also need to take into consideration second-order effects in the development of stress test scenarios.

John Dugan, the chairman of the Joint Forum

John Dugan, the chairman of the Joint Forum and comptroller of the currency in the US, said: ‘This paper highlights critical issues in firms’ ability to identify risk concentrations and one of these relates to stress testing. Not only do firms need to factor liquidity risk into firm-wide, integrated stress tests but they also need to take into consideration second-order effects in the development of stress test scenarios. Looking forward, firms that employ such techniques in the identification of potential risk concentrations may find they are better prepared to deal with financial market disruptions such as those that have been experienced over the past year.’