Stress Testing
The regulatory agencies expect banks of all types and sizes to have the capacity to analyze the potential impact of adverse outcomes on their financial condition in order to establish and support their risk appetite and tolerances, set concentration limits, adjust strategies, and appropriately plan for and maintain adequate capital levels.
The regulatory agencies consider some form of stress testing or sensitivity analysis of loan portfolios on at least an annual basis to be a key part of sound risk management for community banks.
Community banks that have incorporated such concepts and analyses into their credit risk management and strategic and capital planning processes have demonstrated the ability to minimize the impacts of negative market developments more effectively than those that did not use stress testing.
Stress testing should foster dialogue between the board, management and its regulators regarding the bank’s potential risks. Possible questions to be able to answer are:
What are the bank’s key vulnerabilities?
What impact will adverse economic or market conditions have on those key vulnerabilities?
Are risks fully understood and acceptable?
Has the bank established appropriate risk and concentration limits around its key vulnerabilities?
Does loan policy reflect appropriate underwriting standards to mitigate the impacts of stress?
What is the impact to Capital and Earnings?
How have the board and management arrived at these conclusions?
As a trusted partner we can provide you a tested and effective tool that will result in answers to many of these questions.
Our Stress Testing Solution includes:
Transactional Level Testing
Portfolio Level Stress
Stress Factors tailored for your Institution
Quantification of the impact to Earnings, Capital, and Non-Performing Levels
We can provide you a common-sense solution that not only provides management and the Board of Directors a sound platform to assess the risk in your portfolio, but that also meets regulatory expectations.