Big U.S. Banks Are Letting Stress Tests Make Decisions for Them

(Bloomberg) -- If you’re a bond trader at a major bank, the next time you ask for an increase in your position limit, the answer is likely to be based on regulatory stress tests.

Seventy-eight percent of global banks now use the tests to assess concentrations and set limits internally, according to a Deloitte survey to be released Wednesday. That’s up from 67 percent in 2012, the first time the same question was posed. Eighty-seven percent of respondents said they use capital stress tests for strategy and business planning, up from 68 percent seven years ago.

The tests are a post-crisis phenomenon, first started by the U.S. Federal Reserve in 2009 to help restore confidence in the biggest banks, which had previously used their own formulas for allocating capital to different businesses and setting limits for trading desks. After the crisis, the tests replaced banks’ own calculations in how regulators set minimum capital requirements -- and are now playing a bigger role in internal strategic decisions too.

“Over the last decade, regulators’ stress tests have been increasingly used by bank executives to evaluate the impact of big decisions on the business,” Edward Hida, a partner with Deloitte’s risk-advisory unit and author of the firm’s global risk-management survey, said in an interview. “Banks may need to run these stress tests even more frequently -- and especially when the market has such violent and volatile market swings as we’re facing now.”

Big U.S. Banks Are Letting Stress Tests Make Decisions for Them

Stress tests even influence most of the firms’ merger decisions, according to the Deloitte survey. The number of respondents saying so rose to 55 percent last year from 27 percent in 2012. The latest survey was conducted between March and July among 94 financial institutions around the world. More than 60 percent were banks, but insurance and investment-management firms also took part.

Cybersecurity is seen as a risk that would increase most in importance over the next two years, the Deloitte survey also found. Sixty-seven percent of respondents picked it as among the top three risks, while 40 percent placed it at No. 1.

The largest banks have been spending close to $1 billion each to beef up their cyber defenses as high-profile breaches in every industry have increased public and executives’ awareness. In a survey released in December, 84 percent of U.S. financial firms said they expected to increase their cybersecurity spending in coming years.

©2019 Bloomberg L.P.