Saturday, January 17, 2015

Stress Test performance evaluation time


We have a perfect environment to ask if you and your colleagues did a sufficient job constructing alternative scenarios and then stress tests and if you were really good installing mitigating mechanisms.

We have been pitching stress testing for a long time.  Look at the batting order:

              Wildly volatile commodity prices, within historical boundaries, but over more than five months

              Currency fluctuations, again within norms but compounding commodity prices

              Global energy restructuring, anticipated but arriving very fast

              All market volatility compounded by publicized trading scandals from the ‘fix’ to black pools

              Huge regulatory fines for legacy major movers that do not seem to stop

              Changing government policies, compounded by changing multinational policies (accounting)

              Multiple forces moving sentiment, starting with geopolitics

Most companies and institutions anticipated perturbations across these domains, but was the test sufficient?  Did the order of magnitude of the tests include the combined effects? Can you do your own performance evaluation, as well as build lessons learned?

I am not concerned about the professional planners (and economists from time to time) since this is not new.  I am surprised by the companies (some very large) who were either 100% ignorant, or ignored the obvious.  Leading the pack are the forex trading firms that continue with 50 to 1 margin requirements, and the governments who kept their budgets based upon $100 oil.

 It means we still have evangelical work to do.

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