Skip to main content

Looking for Valuant? You are in the right place!

Valuant is now Abrigo, giving you a single source to Manage Risk and Drive Growth

Make yourself at home – we hope you enjoy your new web experience.

Looking for DiCOM? You are in the right place!

DiCOM Software is now part of Abrigo, giving you a single source to Manage Risk and Drive Growth. Make yourself at home – we hope you enjoy your new web experience.

Capital thresholds for banks: What examiners expect

September 3, 2013
Read Time: 0 min

There are a variety of stress tests that banks and credit unions can employ to determine what their capital levels would be in given stress scenario.

It’s important to remember that the stress scenarios are for planning purposes. They are unexpected situations, so it is likely that the financial institution could and should fall below its capital requirements in the most stressful scenarios. The idea of the stress test is not to demonstrate that the institution would still be above the required capital levels, but instead to show what circumstances could cause capital problems for the institution, and thus for the financial institution to demonstrate contingency planning around what they would do to maintain capital adequacy should the unexpected stressful situation arise.

Currently, examiners have the following thresholds, which they look for when evaluating the safety and soundness of community banks.

Capital levels for banks

Tier 1 Capital is a primary assessment of a financial institution’s financial strength; how well could the institution absorb losses without a disruption to lending. Total Capital similarly measures the institution’s total capital compared to its risk weighted assets. If this ratio shows the institution is inadequately capitalized, it is likely that institution expanded its lending operations beyond the level supported by capital reserves.

If management finds that, in a stress scenario, capital falls below these thresholds, the institution would have to make a plan that might include:

1. closer monitoring of market information, 

2. adjusting strategic and capital plans to mitigate risk, 

3. changing risk appetite and risk tolerance levels

4. limiting or stopping loan growth or adjusting the portfolio mix

5. adjusting underwriting standards, 

6. raising more capital or

7. selling or hedging loans to reduce the potential impact from such stress events.

These specific actions were outlined by the OCC and illustrate how capital levels can be managed to meet expectations. 

Learn more about stress testing results and how they can figure into capital adequacy assessments to prepare for exam discussion; download the whitepaper How Regulators Gauge Capital Adequacy Under Stress.

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

Make Big Things Happen.