Stress Testing Analysis
The OCC has definitively stated that it expects all banks within the charter to perform some type of stress testing for proper risk management. Similarly the FDIC has strongly recommended the practice. But what is exactly required as part of a portfolio stress testing analysis?
There are several methodologies for stress testing, and the agencies do not advocate for one single method. Different methodologies, including top down and bottom up stress tests, require different amounts and types of data for the analysis, which could be problematic if the bank suffers from:
- Disparate systems for loan and financial data, including core systems, spreadsheets and credit files.
- Outdated collateral or appraisal information for real estate backed loans.
- Insufficient data for risky portfolio concentrations.
- Separation of duties for data entry (often analysts) and stress testing analysis (risk managers or executives).
- Difficulty accessing macroeconomic or peer data to establish and justify scenarios and loss rates.
The ability to incorporate updated and relevant data into stress tests will provide banks and credit unions, regardless of size, with significant benefits as they strive to identify and mitigate potential risks in their loan portfolio. Institutions that are implementing stress tests can look to software for assistance with data collection, segmentation and stress test reporting that meets examiner expectations.