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Portfolio Risk & CECL Stress Testing

Concerned about portfolio risk stress testing? You’re not alone.

Regan Camp
March 20, 2026
0 min read

This article covers these key topics: 

Satisfying reviewers' expectations for stress testing 

Financial institutions strengthen their portfolio stress testing, satisfy examiners and auditors, and gain real-world risk insights by connecting portfolio-level results to loan-level behavior and CECL assumptions.

Stress testing expectations are evolving

Over the past few weeks, I’ve had three separate conversations about stress testing. One followed an exam. Another came during a CECL validation. The third happened in a working session with an Abrigo bank customer reviewing allowance results.

Three different settings. Three different stakeholders. The same types of concern surfaced each time:

“We’re getting a lot more questions about stress testing.”

“They want to understand how we’re stress testing our portfolios.”

“We have stress testing… but I’m not sure it’s at the level they’re expecting anymore.”

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Top-down stress testing results can feel incomplete

If one of those sentences sounds familiar, you’re not alone. I’ve yet to leave a conversation like this without someone eventually pausing and saying quietly, “We should probably revisit this.”

Variations of this same feedback are showing up across a wide array of institutions. Regulators, auditors, and financial institutions themselves are all pointing toward the same conclusion: stress testing expectations are evolving, and many programs haven’t fully evolved with them yet.

Top-down, portfolio-level stress testing still plays an important role and is often the starting point for institutions trying to understand aggregate exposure. It helps leadership frame the big picture and supports board-level discussions around earnings sensitivity and capital adequacy.

On its own, however, that view can feel incomplete.

Increasingly, examiners and auditors are looking for a clearer connection between portfolio-level results and what’s actually happening within the loan portfolio. They want insight into where losses originate, which segments are most sensitive to changing conditions, and how risk migrates as the environment deteriorates.

As a result, when presentations of portfolio-level stress testing results start to sound a little too high level, you might see an examiner, auditor, or even someone on the institution’s own risk team lean forward and ask, “Okay… but which loans actually move first?” That’s not a trick question. The question is less about the numbers themselves and more about whether the institution truly understands how its portfolio behaves under stress.

The connection between stress testing and CECL

Stress testing is not new. It’s been emphasized for years, and I’ve been one of many voices making that case along the way. What has changed is the context around it.

With the adoption of CECL, regulators have been explicit that stress testing and allowance methodologies should no longer operate as separate, parallel exercises. Both rely on forward-looking views of credit loss, and both depend on an institution’s understanding of how economic conditions influence portfolio performance.

In a statement on CECL and stress testing, the Federal Reserve noted that “the current approach is conceptually similar to the CECL standard, as both methods are based on a forward-looking estimate of losses.”

That framing matters. When stress testing and allowance estimates are both grounded in forward-looking assumptions, the bar naturally rises for how results are constructed, interpreted, and explained.

In practice, that linkage tends to raise three questions during examinations and validations:

  • How do stress scenarios affect specific portfolio segments, rather than just the overall portfolio?
  • Do the assumptions used in stress testing align with the drivers used in the allowance methodology?
  • Can management explain which segments or borrowers are most vulnerable when conditions deteriorate?

When institutions can clearly walk through those points, conversations with examiners tend to move quickly toward implications. When they cannot, the discussion often returns to how the stress test was constructed in the first place.

When stress testing stays at the surface level

For a long time, stress testing occupied an odd space for many institutions. It existed largely as an annual exercise because it had to. And it followed this pattern: Run the scenario. Present results to leadership. Leave the analysis unchanged until the next cycle. I’ve literally seen stress testing decks that come out once a year, usually right before a meeting, and then disappear until the next cycle – untouched, unquestioned, and slightly out of date.

That approach was easier to defend when stress testing served primarily as documentation. It’s much harder to defend when regulators expect the analysis to demonstrate how the portfolio behaves under stress.

Risk can build quietly. Conditions can shift faster than portfolios adjust. In that context, stress testing is less about satisfying a requirement and more about understanding how exposed a balance sheet really is, especially when allowance estimates themselves are already grounded in forward-looking assumptions.

Portfolio-level stress results can show that losses increase under a recession scenario. The next question is where those losses originate.

Consider a commercial real estate portfolio as an example. A CRE stress scenario might indicate higher losses overall. The follow-up discussion often centers on which exposures drive that change. Office properties may react differently than owner-occupied commercial real estate. Construction loans may respond differently than stabilized properties. Loans with higher loan-to-value ratios may show earlier deterioration than those with stronger collateral positions.

Institutions that can trace stress results to those types of characteristics usually have a much easier time explaining their analysis. Those that cannot often find themselves defending assumptions rather than discussing the implications of the results.

Bridging portfolio results and loan-level insights

Connecting broader assumptions about portfolio-level results with loan-level behavior aligns closely with how CECL works. Allowance models already force institutions to think more deeply about segmentation, economic loss drivers, and the timing of credit losses. When stress testing doesn’t reflect that same level of insight, the disconnect becomes obvious – especially under examination.

Institutions with more developed stress testing practices tend to bridge the gap between broad assumptions and loan-level behavior more effectively. Some characteristics that seem to appear consistently, in my experience:

  1. Results are presented at a segment level, allowing leadership to see which parts of the portfolio are most sensitive to economic change.
  2. Stress assumptions generally align with the drivers used in the allowance model, including segmentation and credit migration logic.
  3. Teams can run multiple degrees of severity, rather than relying on a single static scenario.

Most importantly, management can explain the results in practical terms. Instead of simply stating that losses increase under stress, they can describe why those losses increase and where the pressure in the portfolio is likely to emerge.

When those explanations exist, conversations with examiners and boards tend to shift from debating methodology to understanding implications.

In many cases, the issue was never a lack of awareness around risk, but a lack of depth in how that was being demonstrated.

The value of stress testing after exam season

Another shift becoming more common is how stress testing is used outside of exam season.

When stress tests are flexible enough to run multiple degrees of severity and explore different risk drivers, they naturally begin informing strategic planning discussions. Institutions often use stress analysis to evaluate questions such as:

  • How a commercial real estate concentration might affect capital during a recession
  • Whether planned loan growth could create pressure on earnings or capital under stress
  • How changes in underwriting standards might influence loss outcomes over time

Interestingly, this is often where teams realize stress testing becomes less stressful. When it’s used regularly, it stops feeling like a fire drill and starts functioning like a planning tool.

Capital decisions feel more grounded. Concentration risk becomes easier to visualize. Even underwriting and pricing conversations benefit from a clearer understanding of how loans behave under pressure.

Well-designed stress testing also creates a shared framework across credit, finance, capital planning, and allowance discussions. Instead of siloed views of risk, teams begin responding to a consistent narrative about how the portfolio performs under different conditions.

 

Would your stress test identify where losses will emerge?

The questions being asked by auditors, examiners, and management in risk discussions today reflect that shift. They go well beyond whether a scenario was run and focus instead on how scenarios were designed, how assumptions were selected, and how results influence decisions. And the institutions that can clearly walk through that logic tend to have very different conversations than those relying on surface-level stress tests.

It’s worth emphasizing that stress testing doesn’t need to be overly complex or academic to meet those expectations. It does, however, need to be intentional and designed to surface risk rather than obscure it.

Stress testing, I’d argue, is experiencing a quiet resurgence because institutions, boards, and regulators all recognize the value of understanding stress risk in a deeper, more actionable way.

For institutions willing to reassess how they approach stress testing, the payoff goes well beyond regulatory comfort. It’s better insight, stronger preparedness, and a clearer view of how the portfolio might behave when conditions don’t follow the plan.

For many risk teams right now, the most important question isn’t whether stress testing exists, but whether it’s telling them what they actually need to know: If economic stress began affecting the most vulnerable borrowers tomorrow, would the stress test identify where losses emerge and how they affect earnings and capital?

Institutions that can answer that question clearly tend to have different conversations with examiners, auditors, and boards than those presenting stress results that remain disconnected from the portfolio itself.

Get more out of stress testing with less effort. Abrigo can help.

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About the Author

Regan Camp

Vice President, Portfolio Risk Sales and Services
Regan Camp is Abrigo’s Vice President of Portfolio Risk Sales and Services, leading a team of subject matter experts who assist financial institutions in accurately interpreting and applying federal accounting guidance. He began his career in financial services as a commercial loan officer at a $2.1 billion institution. He then

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