Beyond Stress Testing, Toward New Playbooks

Blog Post

Beyond Stress Testing, Toward New Playbooks

“Big A” analysts in treasury are hoping to free up resources from stress testing for regulatory purposes to focus also on banking business challenges like modelling depositor behavior. Modelling deposits and more will now go beyond betas – or the sensitivity to Fed rate changes—to look at myriad factors. It’s time for new playbooks!   
Members of the Bank Treasurers’ Peer Group met on May 9-11 in New York to discuss how bank regulatory reform is progressing, share experience with the latest rounds of stress testing and consider how reg reform will change them. They also considered the rate outlook and how to position themselves in terms of asset sensitivity and, most importantly, how to model deposits—looking beyond betas, or the sensitivity to Fed rate moves, to myriad factors. This represents the current focal point of shifting “big A” analytical resources, typically found in treasury, from focusing solely on stress testing, expected to become less onerous with new legislation and Trump prudential regulator appointments, to also look at banking business challenges like deposit acquisition and runoff mitigation.
Among the key takeaways: 
• Crapo bill expected to pass before Memorial Day. The Crapo bill, among other things, will move the line for SIFIs from $50B in total assets to $250B with an 18-month phaseout for banks between $100B and $250B. According to our opening dinner speaker, the legislation could have gone further, but the significance of moving the line is important, which was corroborated in our session the next day. 
This takeaway proved true, with Congress passing the bill Tuesday. Per the New York Times: (Congress Approves First Big Dodd-Frank Rollback): 
“A decade after the global financial crisis tipped the United States into a recession, Congress agreed on Tuesday to free thousands of small and medium-sized banks from strict rules that had been enacted as part of the 2010 Dodd-Frank law to prevent another meltdown.
In a rare demonstration of bipartisanship, the House voted 258-159 to approve a regulatory rollback that passed the Senate earlier this year, handing a significant victory to President Trump, who has promised to “do a big number on Dodd-Frank.”
Still, the end of stress testing is not at hand… 
• Don’t plan on shelving CCAR or DFAST next year. While some members below the $50B or $100B thresholds would love to shelve full stress-testing submissions as soon as next year, it is probably still wishful thinking to expect requirements to fall off so fast—but it is still possible. Stress testing will continue without regulatory fiat—this remains the consensus—but members want to be able to scale back documentation, model validation requirements and governance overkill. For example, what if models could be validated on a multiyear staggered basis? Also, could stress tests keep to the Fed variables or be even further refined to focus on the most useful in consideration of the expense and effectiveness of the others?

What will banks do as a result of less onerous stress testing?
• Opportunity to deploy analytical resources honed by stress testing. New deposit and other banking playbooks will be written using “big A” analytical capabilities typically found in treasury that have been honed by stress testing and the resources built up for them. Deposit modelling is just one element of this. What factors are driving deposit retention and acquisition apart from rate sensitivity, including marketing spend and customer persona?  Also, what might banks offer depositors to reduce runoff as rates rise? This is all a part of a deployment of predictive analytics to drive better decisions. 
• Deal with new competition. It is also timely to help community and regional banks better compete with larger banks, direct/internet banks and fintechs looking to home in on their business. Like everyone, banks need to make more time for digital transformation.
It’s the beginning of a new era for banks. 

Following are NeuGroup Founder Joseph Neu's key takeaways from the meeting:
For more than two decades, NeuGroup has lead the way in peer knowledge exchange for treasury and finance professionals. With an unrivaled network of 18 invitation-only peer groups, NeuGroup facilitates more than 30 face-to-face meetings that connect peers, exchange knowledge and distill discussions. These face-to-face interactions, coupled with formal benchmarking, inform actions, transform practices, and enhance careers for the 440 members of the NeuGroup Network. Find out how you can connect at