By: Michelle Patana
The Office of the Comptroller of the Currency has provided more guidance to community banks on the most effective means of stress-testing with the hope that additional clarity will make the process simpler.
Stress-testing was enacted in 2009 as a method of assuring investors that a bank could remain financially solvent in the wake of another economic crisis. While stress-testing was originally designed for the nation's largest banks, many local institutions are growing significantly and may be required to undergo stress tests if they hold assets of $10 billion or more. Community banks have recently voiced their opposition to being required to undergo stress tests, citing the heavy burden and compliance costs that these analyses impose. Further, many that have employed smart banking strategies have never been required to face these types of examinations, and the Federal Reserve, Federal Deposit Insurance Corp. and OCC failed - until now - to outline rules for stress-testing smaller institutions.
Financial services company Sageworks said the new guidance may significantly aid smaller banks in preparing for their reviews.
"The main concern banks have had on this topic is the lack of transparency behind the stress testing process," said Shea Dittrich, Sageworks director of business development for financial markets, told Forbes. "This guidance gives community banks more direction on where to start their own stress testing, and it reduces the level of ambiguity we were hearing about from banks."
Stress-testing does not need to be overly intensive
The OCC noted that community banks should begin by evaluating their loan portfolios on an individual level to gauge their strength. For example, the federal agency suggested that banks allow senior management officials to examine loan portfolios on an annual basis. A yearly review may enable officials to better measure the level of risk posed to each loan category based on how heavily their loans are concentrated. In addition, the OCC noted that implementing a two-year projection when stress testing is important, because it generally takes losses this amount of time to emerge following a downturn.
"Community banks that have incorporated such concepts and analyses into their credit risk management and strategic and capital planning processes have demonstrated the ability to minimize the impact of negative market developments more effectively than those that did not use stress testing,” the OCC said.