BANK STRESS TESTING: IS PR UNDERMINING THE WORK OF BUSINESS CONTINUITY PROFESSIONALS?
Ireland’s banks are in an even more parlous state than was previously imagined. Apparently, they need an additional 24bn euros to bring them back to health. The total amount poured into the Irish banks since the financial crisis began is now close to 70bn euros.
All of which is a little surprising as all the Irish banks passed the sector’s much vaunted stress tests last year. Some pundits argued at the time that these were no more than a PR attempt to add lustre and confidence to a tarnished industry. If that was the case it was blown apart three months later when Allied Irish Banks (AIB) was the first to go cap in hand to the Irish government.
Stress tests failed the stress test of public opinion and were widely discredited. Some argue that these tests were not stress tests at all but simple, if incorrect, analysis: and the phrase stress testing was no more than catchy PR. One analyst commented: “In order to stress test something, you have to put it under load and see how it behaves. You stress test an aeroplane wing by bending it until it breaks. You do not stress test something by studying it carefully and working out what you think its behaviour is likely to be.”
The FSA now accepts that existing stress tests failed to spot the looming financial crisis when the subprime mortgage market in the US began to unravel in late 2006. As a result, the talk now is of reverse stress testing, which will make firms imagine they have failed and work backwards to determine which risks and vulnerabilities caused their hypothetical collapse. Time will tell if this new sort of test will be any more successful.
Confidence is an essential part of a successful banking sector and should of course be promoted. Stress tests can play their part, but if they are just seen as PR spin they will be entirely counter-productive. They will also have the effect of undermining the serious work done by business continuity professionals in anticipating and mitigating risk.
The FSA and other regulators need to be careful: otherwise stress testing will become just another oxymoron. As film magnate Sam Goldwyn famously said: ‘A verbal contract isn't worth the paper it's written on.’ The same might be said for stress tests!