Position on Regulatory Stress Testing Guidance for Community Banks

By Rob McDonough, Senior Managing Director
Angel Oak Consulting Group

A Statement to Clarify Supervisory Expectations for Stress Testing by Community Banks was issued jointly by the FDIC, FRB, and OCC on May 14, 2012. This statement, while emphasizing the importance of assessing risk under various scenarios for all banks, provided explicit clarification that “… community banks are not required or expected to conduct the enterprise-wide stress tests required of larger organizations under the capital plan rule, the proposed rules implementing Dodd-Frank Act stress testing requirements, or as described in the stress testing guidance for organizations with more than $10 billion in total consolidated assets.”

The Statement reiterated that “… all banking organizations, regardless of size, should have the capacity to analyze the potential impact of adverse outcomes on their financial condition.”  Specific reference was made to existing guidance for three areas of major concern:

Commercial Real Estate (CRE) Concentrations

“Institutions should perform portfolio-level stress tests to quantify the impact of changing economic conditions on asset quality, earnings, and capital.  Institutions should consider the sensitivity of portfolio segments with common risk characteristics.  The sophistication of stress testing should be consistent with the size, complexity, and risk characteristics of the CRE portfolio.”

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