Tale of 2 banks: Fine-tuning strategy after stress tests
By Cathy Moore, Sageworks
In a previous post, we looked at why small institutions are new to stress testing – pressure from regulators has been slight until recently. But as institutions take on this challenge, there are actionable results that even small institutions can use to improve. For example, stress test results can help them avert risk and improve risk rating methodologies. Here we look at how stress testing can help banks and credit unions adapt strategies.
Financial institutions can also utilize the results of portfolio stress testing to increase understanding of the risks inherent in certain segments of their portfolio and to leverage that information for strategic decisions on concentration limits and portfolio mix.
For example, executives at financial institutions are finding that an effective stress testing program can help them better understand where the loan portfolio may be overexposed in terms of concentration, in type of real estate, geography or other factors. They are better able to identify which types of loans within a certain concentration have more potential for troubles, allowing them to make adjustments accordingly.
At First City Bank in Columbus, O.H., President Charlie Cecil explained, “Through this analysis our bank was able to adjust underwriting strategies on certain product lines and property types. We were able to recommend changes to loan policy. As a result, for the retail property segment, that included requiring more down payment and higher debt service coverage ratios to lower the composite risk in this segment. As we continue to track this segment and if our risks continue to increase, we will be able to further tighten our underwriting and better manage risks.”
Financial institutions can also use results of stress testing to identify and target potentially problematic loans for additional scrutiny, such as more frequent rent-roll reviews or owner-income updates. Steve Wertman, portfolio manager at Heartland Bank, explains, “One of the biggest benefits to the bank is that stress testing has helped us identify individual loans that were more susceptible to stressed scenarios. As these loans are identified during stress testing, the bank keeps a better watch on them over time so they can identify any issues early on.” Financial institutions can also adjust marketing strategies once problem areas are identified in order to target and attract certain, less risky segments.
To learn more about stress testing in community banks, download this whitepaper: Actionable Stress Test Results for Community Banks.
Or, learn more about how Sageworks’ top down stress testing solution, Sageworks Stress Testing, can be used to deliver these reports.