Software Stress Testing: A Significant Component of the Overall Governance

Software Stress Testing: A Significant Component of the Overall Governance

The application stress testing also is an important aspect to be considered in the risk communication with the bank. Not just internal communication, it also pays a crucial role in external communication. A bank also prefers to decode its stress test results to help the market entities to have a fair idea about risk profile and management.

The overall accountability of the software stress testing exercise rests with the directors; however, the implementation of the stress testing programme is taken care of by the higher management authorities. This allocation of responsibilities optimizes the efficient use of application stress testing. A lot of particular choices are made in software stress testing along with their major implications. Hence, these should be properly listed down so that the higher management authorities of the stress testing company is fairly acquainted with the limitations of the stress tests being performed.

The higher management must be able to locate and lucidly enunciate the risk factor associated with the bank. Also, it must be able to comprehend the effect of stress events on the bank's risk profile. Then the review and detection of potential stress events must be done to chalk out the effective risk mitigation strategy.

The application stress testing results can be utilized as tools in decision making as these are fairly valuable in decoding the vulnerabilities, which are seen as costly affair by the bank to afford. The entire exercise of stress testing must be actionable and taken into the account for the decision-making process such as strategic business decisions at a managerial level.

A wide range of decisions are supported by the stress tests, which must be used for creating the risk profile of the enterprise. Else, these can be used for establishing the exposure limits. Strategic business preferences are evaluated using stress tests when the discussions of long-term business roadmap are done. Also, the results of these tests are made a part of the liquidity planning process.

Software stress testing is an important component of the ICAAP, which is internal capital adequacy assessment process. This prompts the bank to opt for thorough and futuristic stress testing that labels probable events or dynamic market conditions, which can have an adverse impact on the bank.

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