Community bank stress testing

On October 18, 2012, the OCC released guidance to community banks under $10 billion in assets to provide more transparency as to what expectations are for community bank stress testing and how to perform stress tests. The OCC emphasizes community banks should begin with a simple portfolio stress test, conducted on at least an annual basis. The OCC also recommends stress testing at the concentration and loan level, especially for concentrations of concern, such as CRE.

Though the OCC does not recommend one particular method, it outlines common elements all stress tests should have:

1. Plausible “what if” questions about key vulnerabilities,
2. Reasonable determinations of the impact the stress event or factor might have on earnings and capital, and
3. Incorporation of the stress test analysis into a bank’s overall risk management process, asset/liability strategies, and strategic/capital planning processes.

What does this mean for community banks, and how can Sageworks help? Sageworks Stress Testing allows a bank to perform transaction stress testing and portfolio stress testing, as well as hone in on particular concentrations of concern.

Sageworks Stress Testing provides the three common elements every stress test must have:

1. The ability to create a variety of “what if” scenarios,
2. The estimated impact of stress events or factors on earnings and capital, and
3. Detailed reporting on the results of the stress test analysis to incorporate into management processes, meetings, and strategic decisions.

Sageworks Stress Testing includes detailed reporting and documentation to (1) help defend stress assumptions that could be questioned during audits and examinations and (2) strengthen expected loss scenarios. The solution also integrates with a bank’s core processing system to increase efficiency, and Sageworks also provides training and support sessions during which Sageworks consultants help banks implement and continuously improve the stress testing procedure.

Watch a demo of Sageworks Stress Testing or request more information.

Download this free whitepaper to learn more about the benefits of stress testing and how to avoid potential pitfalls: Stress Testing: The Who, What, When & Why