How to stress your CRE portfolio
Many banks are familiar with top-down stress tests, as these tests may not necessarily require the use of a sophisticated model and there is an accepted way to implement the tests. Bottom-up stress testing, however, is not as clearly defined by guidance and is often left up to the institution for interpretation.
Commercial real estate (CRE) concentrations and the added risk of these loans are a fact of life for many banks. Whether the bank already has a large CRE concentration or is targeting the segment for growth, CRE stress testing is a key component of an effective risk-management framework and can be one of the best ways to defend and support a CRE concentration.
But, CRE stress testing presents a number of challenges. Historically, commercial real estate has drawn more speculation than residential markets—and is consequently, more volatile. Additionally, as regulatory expectations and implementation continue to evolve, it is difficult for many banks to come up with a plan for the CRE portfolio.
To help define a stress testing process, Sageworks has teamed up with CEIS Review to provide a stress testing webinar on Drafting a Battle Plan for the CRE Portfolio on August 27, 2014, at 2pm EDT. During the webinar, CEIS Review’s Liz Williams discussed regulator expectations, methodologies available for banks depending on portfolio complexity and stress testing best practices.
Williams is the managing director of special projects and complex reviews at CEIS; with over 25 years of experience in banking, she has extensive stress testing knowledge and has held leadership positions in credit, loan review, risk management and portfolio management.
In addition to a general background on stress testing the CRE portfolio, Williams covered:
• Creating a CRE stress testing program, including data requirements
• Developing meaningful scenarios and stress assumptions
• Projecting potential rating migration and estimating losses
• Using stress test results to assess the impact on capital and reserves
This webinar was geared towards C-level executives who would like to develop or enhance their stress testing programs. For banks that already have an established CRE stress testing program, Williams discussed how to enhance stress testing processes as well as areas of focus for regulators, including expectations for governance, incorporation in other management / risk management process and maintaining a “challenge” approach to stress testing.
Following the webinar, Williams was available to answer questions relating to commercial real estate concentrations and stress testing.
Sageworks regularly hosts webinars for bankers, covering topics like qualitative factors for the ALLL, using stress test results and best practices for global cash flow analysis. Bankers can view upcoming banking webinars or access the webinar archive for on-demand webinars.