Why is stress testing important?
The thesis from regulatory bodies these days is that every bank needs to stress test their loan portfolio, but many financial institutions continue to seek guidance on what stress testing is and why it’s important.
Stress testing is a best practice for banks that demonstrate proactive and progressive improvement, according to Mike Lubansky, director of consulting services at Sageworks.
“Stress testing can be an exercise and process to help bankers make better, more informed credit decisions, to look at different scenarios and to evaluate and understand the risk potential and vulnerabilities in the portfolio,” Lubansky said, speaking recently at a conference of federal bank examiners from the FDIC, OCC, NCUA and the Federal Reserve.
Speaking at the Supervisory Updates & Emerging Issues Conference for Community Financial Institutions in Washington, D.C., Lubansky said the process of stress testing also creates a set of data to support conclusions that may help financial institutions identify areas of extra risk in their portfolio.
In addition to describing the strategic benefits of stress testing, Lubansky provided information on top down and bottom up stress testing and common data challenges experienced by financial institutions.
To see a similar presentation by Lubansky, access our on-demand webinar: Stress Testing the Loan Portfolio.