Startups take on stress-testing tech

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One of the tenets of banking is to steer clear of trouble with regulators, especially when it comes to demonstrating that one's bank has ample capital.

Yet another is assuring shareholders that capital is being used as efficiently as possible.

That is why the emerging field of regtech is developing data-crunching, automated products that seek to help banks precisely determine how much capital to allocate and where so they can pass stress tests while maximizing returns.

“When we pull different tests using this technology, that’s the starting point for capital planning,” said Ashley Stengel, head of business performance and lead for financial planning and analysis at the $12.1 billion-asset Great Western Bank in Sioux Falls, S.D.

“This last quarter we had a buyback," she said. "We’re able to have that analysis to support that movement forward with that decision.”

Great Western uses Vena Solutions to pull together regulatory reports from various parts of the bank, automate workflows and be able to see all the reports in one place.

With manual processes, it is difficult for banks to create a detailed analysis. Wherever there is ambiguity about data sets, banks will err on the side of conservatism and set aside more capital than is perhaps necessary, said David O’Connell, a senior analyst at Aite Group.

“Banks are under pressure to manage their capital and liquidity more effectively,” said Marc Andrews, vice president of Watson Financial Services at IBM. “It’s driven more granular levels of analysis so that banks can make sure they are holding appropriate amounts of capital. If they don’t [have] additional details, they have to hold additional capital, which impacts the profitability and the net margins of the bank.”

For most banks, technology that cuts down mistakes in anti-money-laundering surveillance and know-your-customer due diligence is top of mind for executives interested in regtech, Andrews said. (IBM offers products in each field.) Yet, adding technology to streamline stress testing and financial risk assessments should not be overlooked, he said.

“That real-time updating is a tremendous advantage to us — instead of having to work in a system where we have to wait for overnight runs or some sort of batch processing,” said Scott Erkonen, Great Western’s chief information officer.

The technology has also gotten the attention of investors: In 2017, more than $1 billion dollars was invested in regtech in the U.S. At the beginning of this year, Vena received $115 million in equity financing in a round led by JMI Equity and joined by Centana Growth Partners.

“We had a couple of specific conversations with large U.S.-based banks, and they expressed a need to do regulatory reporting in a way that could draw upon many different parts of the bank with the ability to turn that information over to whoever their requesting regulatory authority is,” said Eric Byunn, partner at Centana.

There is a renewed interest in investing in stress-testing technology because banks may have a chance to argue for lower liquidity requirements with President Trump in the White House, said Don Mal, its CEO.

“Particularly at the smaller banks affected by last year's regulatory relief, we've heard [their] priorities have shifted under the Trump administration — from meeting regulatory needs to streamlining operations and tightening up how they manage their capital,” Mal said.

The tech could be popular for another policy-related reason: Government and markets have become extremely unpredictable, so banks have to be more careful about how they manage their capital, said Jonathan Frieder, compliance technology lead at Accenture.

“Stress testing is definitely becoming a focus in regtech — especially with the volatility of our global politics and economic conditions,” Frieder said.

While promising, this stress-testing technology is still in its early stages of development and adoption.

“There’s been continued investment in a number of companies, and there’s still a tremendous promise of regtech in terms of the value that it can bring,” Frieder said. “It’s still been somewhat measured and nominal.”

Companies that offer a variety of regtech solutions are waiting to see whether banking clients implement their technology on a large scale.

“We’ve seen this joint statement from U.S. regulators that has encouraged the use and application of different techniques,” Andrews said. “But right now, the application or techniques are just sitting on top of and enhancing processes. … What use cases banks are applying is starting to emerge, but they're not bringing regtech under one roof. They’re experimenting with it in various parts of the organization.”

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Regtech Stress tests Liquidity Liquidity requirements Venture capital Venture funding IBM Accenture Aite Group