Stress Testing the Commercial Loan Portfolio: Stress Testing Yields Information That Can Help Banks with Strategic Planning. Don't Wait for the Perfect Solution and Delay the Process of Stress Testing. It's Most Important to Get Started

Hensley, Doug, The RMA Journal

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Why do we stress test? If we have commercial real estate in our portfolio, we stress test because the regulators require it. We also stress test the entire loan portfolio so we can establish policy limits and strategies. And finally, we stress test to quantify the variability of risk under changing conditions.

What are we supposed to stress test? If we have concentrations in commercial real estate, we have to stress test that portfolio. But again, we must look at the entire loan portfolio to assess our capital adequacy and to evaluate risk arising from specific concentrations.

The biggest hurdle to stress testing is that, for many, it's a new concept that has a learning curve. There are few experts or tools available to facilitate training, so working through the learning curve is extremely tough. Another large hurdle is the lack of meaningful data. A likely outcome of the credit crisis is that regulators will push financial institutions to maintain data in …

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Publication information: Article title: Stress Testing the Commercial Loan Portfolio: Stress Testing Yields Information That Can Help Banks with Strategic Planning. Don't Wait for the Perfect Solution and Delay the Process of Stress Testing. It's Most Important to Get Started. Contributors: Hensley, Doug - Author. Magazine title: The RMA Journal. Volume: 91. Issue: 5 Publication date: February 2009. Page number: 44+. © 2007 The Risk Management Association. COPYRIGHT 2009 Gale Group.

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