Poll: Are stress test results incorporated into capital adequacy assessments?
Banks and credit unions that regularly perform loan portfolio stress testing analysis have at-hand additional information that they can use to bolster capital adequacy assessments. Stress testing allows these institutions to anticipate and plan for adverse situations that might otherwise put them at risk, perhaps due to insufficient capital, inadequate ALLL reserves or distressed earnings.
During a Sageworks webinar, How Regulators Gauge Capital Adequacy under Stress, bankers in attendance were asked to what degree their examiners consider or reference stress testing results when discussing capital sufficiency.
More than 50 bankers participated in the poll, and 43 percent indicated that stress testing results were not mentioned as part of their exam’s capital assessment. Thirty-nine percent of responding bankers said that stress testing results were a consideration but one of several factors.
Of all the bankers that indicated results from stress tests were considered—either completely or as one of several factors—the majority of bankers were from FDIC- or OCC-regulated institutions. Last fall, the OCC released guidance endorsing stress tests as one necessary component of sound risk management and capital planning: “The OCC expects every bank, regardless of size or risk profile, to have an effective internal process to (1) assess its capital adequacy in relation to its overall risks, and (2) to plan for maintaining appropriate capital levels.”
The results of the poll validate that OCC examiners are broaching the subject of stress tests, and it appears that FDIC examiners are likewise recommending stress testing analysis as a step of capital adequacy plans.
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.