Where To Start: Stress-testing commercial real estate portfolios
Stress testing, especially for community banks, can be challenging because of the lack of specific methodologies and practices recommended by regulators. This gap exists, in part, to allow banks to come up with their own unique program that shows regulators that they can identify and manage those risk, which is the goal of stress testing all along. But banks need to take that first step. So, where do you start?
The first step is identifying your commercial real estate portfolio into construction and land (ADC) and income producing loans. This can be done by using the banks own segmentation logic or using call reporting logic:
Using just this logic alone would leave the bank with a solid yet basic stress testing program. Regulators are encouraging banks to look at their commercial real estate (CRE) portfolios in greater detail. This detail can include:
– Geographic (county, MSA, business districts, region/state)
– Property type (hotel, office, multifamily, industrial etc)
– Loan type (lines of credit, term and balloon loans (by amortization and term)
It is important for banks to develop a stress testing program that looks at their critical concentrations and then looks at them again in greater detail using the logic above. A stress testing program should be considered custom and unique to the bank. It should stress segments and concentrations where the bank has identified risk and not just blindly look at concentrations.
If you would like to learn more, download “Actionable Stress Test Results for Community Banks.”