Enhance Your Risk Management with AG & CRE Stress Testing
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 require banks to conduct stress tests annually, focusing on commercial real estate (CRE) and agricultural (AG) loan portfolios to identify and quantify large concentrations of risk.
Comprehensive AG and CRE Stress Testing
With a deep understanding of regulatory expectations, Young & Associates performs CRE and AG loan portfolio stress testing using our proven model. Our stress testing process assesses the potential impact of adverse and severely adverse economic conditions as outlined in regulatory guidance. This provides valuable insights for your management team and board of directors, aiding in strategic and capital planning, as well as loan product design and underwriting standards.
Contact Us to Learn More About Our Stress Testing Services
Why Your Bank Needs Stress Testing
Enterprise stress tests for banks explore all aspects of an institution’s balance sheet and income statement over multiple quarters.
Here are key reasons why stress testing is essential:
- Overall Risk Management: Bank stress testing can reveal whether a bank can withstand economic or financial crises.
- Course Correction: Testing under hypothetical situations allows institutions to adjust strategies if outcomes are unfavorable.
- Regulatory Compliance: Various regulatory authorities mandate stress tests for banks of certain sizes.
- Loan Portfolio Insights and Credit Risk Management: Estimate potential credit losses a bank may experience if factors that impact the performance of the loan portfolio weaken.
Added Benefits of Bank Stress Testing
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 to Expect During a Loan Stress Test
During a loan stress test, our consultants will help identify the loans to include, based on criteria from the 2006 CRE Guidance. We define scenarios and use our proven methodology to perform each stress test.
Our report includes expected loss projections for adverse and severely adverse scenarios on a loan-by-loan basis, along with a portfolio summary and a clear explanation of the analysis and results.
Post-Stress Testing Support from Young & Associates
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.
