HMS has developed a specific methodology for conducting “War Games” Workshops for the financial sector. This methodology was developed based on Basel II regulatory requirements and “War Games” Best Practices inspired by Israeli military procedures for simulating combined stressful conditions aimed at training commandership.
The financial system, especially the banks, insurance companies and investment houses, are currently exposed to many inter-correlated risks, including: Financial Risks (such as market, liquidity and credit), Operational Risks, Strategic Risks, etc.
Financial regulators require these financial institutions (FI’s) to define holistic stress tests as part of their risk management framework. These stress tests take into account several simultaneous drastic and extreme events and they test the institutions readiness to deal with these events (i.e. within their ICAAP and ORSA frameworks).
Additionally, the regulators sometimes require the FI’s to conduct physical tests and exercises to test their readiness to deal with such events, although, these tests usually relate to the operational aspects of the stressed events and less to the financial and other aspects. Also, usually, these stress tests are more macro economical, based on global or national events and are not bank specific.
In principle, the readiness of FI’s to deal with extreme events is based on the existence of policies, contingency plans and work procedures as well as having sufficient capital and liquidity reserves and buffers to withstand the events. Additionally, one needs to test the FI’s ability to execute such plans and procedures, in order to continue functioning during such an ongoing stressed event, including: critical decision making, inter-organizational interaction under pressure and delivery of practical solutions according to defined priorities.
HMS’s “War Games” methodology combines the existing regulatory requirements with Israeli Best Practices on conducting multi-disciplinary exercises, so as to test the FI’s ability to function in real time, during such extreme events.
We build the workshop together with the client (FI), so that it fits the client’s reality and specific threats and risks it is exposed to. The client determines specific issues relating to the workshop’s framework, such as: Which level of management is tested, What are the exercise’s boundaries (which risks are taken into account), What is the exercise’s duration (from a couple of hours to a full day), etc.
Next, we build the actual exercise, including the following issues:
Preparing the exercise plan
Defining the exercise’s outline and schedule
Defining the base scenario and several possible sub scenarios
Defining participating personnel and roles
Determining the method of interaction between the participants
Running the scenarios throughout the exercise
Preparing and supplying dozens of additional details and information throughout the exercise
Following developments in financial metrics (such as liquidity, capital, credit), throughout the exercise
Setting up and accompanying a controlling function to monitor and summarize the exercises progress.
Summarizing the exercise including formulating lessons and conclusions about issues such as: The level of readiness, knowledge displayed, functioning under pressure, method of interaction, relying on existing documents, compatibility with the FI’s risk appetite, and more.
The workshop’s goals include:
Examining the bank’s contingency plans for a financial crisis – relevance and applicability.
Examining the bank’s underlying assumptions regarding its crisis policy.
Examining the professional team’s performance in crisis situations, including the ability to recognize and prioritize risks, make decisions and act during stressful situations.
Examining the bank’s preparation of different financial crisis situations, in order to deal with them more effectively, and to reduce potential damage resulting from them.
The workshop’s benefits include:
Encouraging creative ideas that will help the bank to improve policies and procedures on various topics
Updating policies and procedures, decision-making processes, control and measurement tools, emergency plans, etc.
Ultimately – Improving the bank’s preparedness for extreme scenarios that might jeopardize the financial stability of the bank.
This Result is an important component of the second pillar of Basel II.
Our Main Services:
We, at HMS, offer to prepare, together with our clients, a comprehensive “War Games” workshop framework specifically designed for them. We can accompany you throughout the workshop, tailor-made to the client’s requirements, exposures and risk appetite, in order to locate and define the required improvements to the client’s readiness.
We have recently completed a successful workshop at one of Israel’s leading banks, where the CRO decided to run the workshop on the Risk Management division. There are, of course, other options available such as: The senior management level, subsidiary level, department manager level, etc.