It’s like the buzzword that doesn’t go away: stress testing may have seemed like an unnecessary step for many institutions in the past, a buzzword that applied only to the big banks. But with the support of the regulatory agencies, the buzzword is becoming more of a minimum standard.
Given the task is often assigned to the Chief Credit Officer or other leaders within the credit department, developing a stress testing methodology may come at the risk of losing steam on other areas, even business development if the stress tester is also responsible for lending.
Clearly, stress testing is not a good replacement for other critical functions, so banks look for ways to perform the analysis without setting back other priorities.
The good news is that institutions can “get over the hump” pretty easily if they recognize components of the analysis they may already have within the bank. By using the data and results already available, banks can get a jump-start.
Banks and credit unions are already preparing and documenting the allowance for loan and lease losses calculation, which includes determining loss rates for FAS 5 pools and impaired loans. Furthermore, executives already dedicate time to determining and justifying qualitative factor (Q Factor) adjustments that may need to be made to historical loss rates to make them better predictors of expected losses.
These loss rates and adjustments are key components of a top down or institution-level stress test, which may be a good starting place for institutions seeking to get over the stress testing hump.
