Stress test results are most widely incorporated into the individual and portfolio lending decisions, concentrations and limits setting, and the allowance for loan and lease losses. The results are not being utilized fully in strategic planning or capital planning.
Philadelphia, Pa. (October 23, 2008) – The Risk Management Association (RMA) has released results from a survey on Stress Testing and Scenario Analysis practices in community banks. The study, conducted in August 2008, was developed in conjunction with RMA’s Community Bank Council, which is composed of senior-level industry practitioners from RMA member institutions.
The Web-based survey, completed by 316 institutions, focused on current stress-testing practices in community banks. It sought to determine answers to these questions:
- What are the common stress tests?
- Which area is responsible for the testing?
- How are the results shared throughout the organization?
- How are the results incorporated into decision making?
- How is the process documented?
- What are the perceived benefits of stress testing?
Key findings:
- Stress testing is conducted in 42% of the surveyed institutions, with the commercial loan and non-owner-occupied commercial real estate portfolios receiving most resources.
- Results of the stress tests are shared with the board of directors in 66% of the institutions that stress test.
- The results of the stress tests are most widely incorporated into individual and portfolio lending decisions, concentrations and limits setting, and the allowance for loan and lease losses. The results are not being utilized fully in strategic planning or capital planning.
- Current barriers for utilizing stress testing more fully include lack of perceived expertise within the institution as well as lack of systems to enable stress testing.
“Quality assurance is an integral part of life, from the person who gauges the tire pressure for their car to the plant that produces widgets,” said Leton L. Harding Jr., RMA’s Community Bank Council chair. “For the financial industry, it is imperative that we create and continue testing processes to sustain the quality of our primary earning asset, our loan portfolio. RMA and its members have, via this survey, added another rung to the risk management ladder for the industry to reach its goals.”
Institutions interested in participating in future research targeted toward community banks should contact RMA Associate Director Suzanne Wharton at 215-446-4089 or swharton@rmahq.org.
About RMA Founded in 1914, The Risk Management Association is a not-for-profit, member-driven professional association whose sole purpose is to advance the use of sound risk principles in the financial services industry. RMA promotes an enterprise approach to risk management that focuses on credit risk, market risk, and operational risk.
Headquartered in Philadelphia, Pennsylvania, RMA has 3,000 institutional members that include banks of all sizes as well as nonbank financial institutions. They are represented in the Association by more than 20,000 risk management professionals who are chapter members in financial centers throughout North America, Europe, and Asia/Pacific. Visit RMA on the Web at www.rmahq.org
Contact:
Meg McBride
RMA Public Relations
215-446-4110