What is a bank stress test? A bank stress test of your loan portfolio is a valuable risk management tool. Stress tests provide key insights into your organization’s ability to withstand plausible stress events, such as an economic crisis.

Federal regulators expect banks to conduct these stress tests annually, particularly for commercial real estate (CRE) and agricultural (AG) loan portfolios, so institutions can identify and quantify any large concentrations of risk.

With a deep understanding of the regulatory expectations, Young & Associates performs CRE and AG portfolio stress testing using our proven model. Our stress testing process is designed to assess the potential impact of adverse and severely adverse economic conditions as identified within the regulatory guidance. It offers valuable insights your management team and board of directors can use to guide their strategic and capital planning efforts, as well as loan product design and underwriting standards.

Speak with one of our experienced consultants to learn more about our CRE and AG loan stress testing capabilities for banks.

Why do you need a bank stress test?

Enterprise stress tests for banks explore all aspects of an institution’s balance sheet and income statement over multiple quarters.

There are many reasons why banks need stress testing:

  • Bank stress testing can offer clear indications of whether a bank can withstand an economic or financial crisis.
  • Testing a bank’s balance sheet under hypothetical situations, including a variety of economic possibilities, enables the institution to course correct if the outcomes are not favorable.
  • A variety of regulatory authorities require all banks of a certain size to perform stress tests.
  • For bank loan portfolio stress tests, the goal is to estimate the potential amount of credit losses a financial institution may experience if factors that impact the performance of the loan portfolio experience weakness.

What are the added benefits of a bank stress test?

The forward-looking assessment results of these stress tests provide more than an overview of potential losses. They provide meaningful insight into your bank’s level and direction of credit risk, which should in turn inform your strategic and capital planning exercises and credit risk management activities. These insights from the bank stress test results should be used to inform your bank’s concentration risk monitoring and concentration limit setting, loan product design and underwriting standards.

Are community banks required to perform CRE stress tests?

As a general rule, community banks are not required to perform the type of enterprise-wide stress tests required of larger financial institutions through either Dodd-Frank Act Stress Testing (DFAST) or the Comprehensive Capital Analysis and Review (CCAR). However, the 2006 interagency CRE Guidance emphasized that a reasonable and well-documented approach to CRE portfolio stress testing, undertaken at regular intervals, is the most effective way for community banks to meet examiner expectations and to contribute toward effective risk management of CRE concentrations.

What should my bank expect during a loan stress test?

What is stress testing related to loans? During your bank’s loan stress test, our consultants will help you identify the population of loans to include in the test, based on the criteria established in the 2006 CRE Guidance. We’ll define the scenarios and use our proven methodology to perform each stress test.

Our report will provide expected loss projections based on the adverse and severely adverse scenarios on a loan-by-loan basis, as well as a summary of portfolio expectations with a narrative that provides a clear and concise explanation of the analysis and results.

How can Young & Associates support me after stress testing?

For added flexibility and convenience for your financial institution, Young & Associates can perform these bank stress tests remotely, rather than on-site. Contact us to get started.

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