The Headache: Regulators made it clear that stress testing as required for banks over $10 billion under Dodd-Frank is not required for community banks. But community banks face many financial challenges today--rate risk, loan risk, and even liquidity risk, over the horizon. Vendors, including one endorsed by ABA, offer stress testing to community banks.
Our Question: Has your bank tried stress testing on its own? Is it worth the time and expense?
Come see what other bankers think, and add your own views
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Has your bank tried stress testing on its own?
Community banks face numerous financial challenges these days, some of which are mind bending, and many of which make the value of a crystal ball obvious. Lacking one, banks can only make an effort to project the impact of various changes in conditions on their finances.
Below is a sampling of what we've heard so far from community bankers. Add your own ideas and suggestions.
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today.
Let's hear your views and ideas below! (Editorial Note: Contributions to Pass the Aspirin may also appear in our print edition. While we will ask for your e-mail address, this is only as an aid to verifying identity and will not be used for any marketing or promotional purpose. The e-mail address will not be published.)
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James M. Cantrell, senior vice-president and chief risk officer, MidWestOne Bank, $1.7 billion-assets, Iowa City, Iowa.
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Although not as comprehensive as the stress testing required of the largest banks, we conducted a high-level (as opposed to a loan-by-loan) stress analysis of the bank's loan portfolio. To briefly describe our methodology, we first calculated the bank's actual loss experience for every loan category (Const. & Dev., Commercial, Commercial R/E, Agricultural, Ag. R/E, Residential R/E?) for each of the last five years. Once the annual loss rates were determined, we then calculated a "stressed" level of loss using loss rates that were two standard deviations above the mean. In our case, estimated losses under the stress scenario were approximately 6.5 times our average loss experience, or equal to our pre-provision, pre-tax net revenue. This type of high-level analysis can be performed in Excel, but requires superior data handling skills. The testing gives us a measure of confidence that our balance sheet is capable of withstanding an adverse credit cycle. It also tells us that there is a considerable level of correlation in losses among the various loan categories. Lastly, an examination of test results has led us to acknowledge that certain portions of our portfolio (primarily Ag. R/E) have experienced very low loss rates over the measured horizon. This is not surprising given the observable rise in the price of farmland in our market, but it underscores the need for additional analysis to understand the impact on these segments of changes in land values and commodity prices. |
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