Academic journal article ABA Banking Journal

Headache 2: Stress Testing for Community Banks

Academic journal article ABA Banking Journal

Headache 2: Stress Testing for Community Banks

Article excerpt

Regulators mode it clear that stress testing, as required for banks over $10 billion under Dodd-Frank, is not required for community banks. But has your bank tried it? Was it worth the time and expense? Tell us at http://tinyurl.com/techintrouble

Remedy 1: Tests can build confidence

[ILLUSTRATION OMITTED]

James Cantrell, senior vice-president and chief risk officer, MidWestOne Bank, $1.7 billion-assets, Iowa City, Iowa.

Although it was not as comprehensive as the stress testing for the largest banks, we conducted a high-level (as opposed to loan-by-loan) stress analysis of the bank's loan portfolio. We first calculated the bank's actual loss experience for every loan category (Const. & Dev., Commercial, Commercial R/E, Agricultural, Ag R/E, Residential R/E, etc.) for each of the last five years.

Once the annual loss rates were determined, we calculated a "stressed" level of loss using loss rates that were two standard deviations above the mean. …

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