EY announces educating Licensed Commercial Banks & Licensed Specialised Banks on Stress Testing
Ernst and Young in
Sri Lanka (EY), successfully carried out an informative halfday training session for all Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs) on Integrated Stress Testing during Pandemic and Pillar
II Risk Measurement.
Rajith Perera, Partner - Financial Accounting Advisory Services of Ernst and Young, Sri Lanka facilitated the workshop. He shared his insights on challenges confronted by financial services sector when assessing regulatory capital post pandemic era for ICAAP submission. During his opening remarks for the session, Rajith stated, “Even though the larger exposure to stress on capital is due to Pillar I risks (minimum regulatory capital for credit and market and operational risk) financial institutions cannot underestimate the effects of the Pillar ii risks (such as Liquidity Risk, Reputational Risk, Cyber Risk & etc.) which could intensify due to the adverse impacts of the Pandemic. As a result, banks may not be able to rely on traditional stress testing and risk measurement techniques (locally and globally) resulting from economic slowdowns and pressures.” This led to the discussion of the importance of having a scientific approach to stress testing and sound risk management framework for Pillar ii Risks.
Discussion highlighted the common weaknesses seen in current practices of financial services such as stressing risks in isolation, limiting stress testing to sensitivity analysis, not considering the impact of macro-economic variables, lack of rationale for application of stress testing methodologies. Further during the session, he covered how Banks could integrate Value at Risk (VaR) models to measure market risk exposures, He went on to elaborate that institutions owning VaR Systems have failed to integrate the output to ICAAP.