Poll: What stress tests are banks performing?
During a recent webinar, Sageworks asked bankers what types of stress testing their institution currently performs. Seventy-eight bankers completed the poll and were able to select multiple types of stress testing if their institution performed several methods.
The results show that the most commonly utilized form of stress testing at financial institutions is a sensitivity analysis or transaction stress test on new relationships or loans. With this loan-level analysis, the underwriter is often trying to assess risk inherent in that relationship and see how cash flow or collateral values would be affected for that particular borrower, given a certain stress scenario.
The next most common forms of stress testing utilized by financial institutions on the webinar were tied; each method was selected by 42 percent of respondents. Forty-two percent perform a loan-level sensitivity analysis at renewal (similar to the analysis previously described but at annual review rather than origination), and 42 percent also perform some time of portfolio-level, top down stress test.
Recent regulations explain how even small, community banks can benefit from a top down analysis, and regulatory bodies provide stress testing templates to use as a starting point for the analysis. The availability of these templates and instructions from regulators might be one reason why this form of stress testing is more frequently used.
Only 34 percent of the respondents currently perform a bottom up stress test on the portfolio, where a stressed scenario is applied to a concentration of the portfolio, and each loan in that concentration or from a sample of the concentration is assessed individually to measure risk. The individual loan results are then aggregated to evaluate the concentration’s total risk and how it could impact the bank’s earnings and capital. Given the data collection challenges that often come with bottom up stress tests, this method can be difficult to implement.
During a webinar, Sageworks shared with the bankers in attendance different approaches they could take with stress testing and explained how the current regulations apply to institutions. Access the Recording