Stress testing remains a best practice and a supervisory expectation for banks of all sizes. Joseph (Joe) Sergienko, head of risk management and quantitative analytics at Navigant agrees. In an interview with the ABA Banking Journal, Joe explains that the current administration has revised the formal stress testing requirements that were created for many of the largest banks following the financial crisis, but they are no longer required to submit reports on a specific schedule, based on specific scenarios.
This does not mean that stress testing has less emphasis for banks. In fact, national banks and federal savings associations with assets under $10 billion remain subject to 2012 guidance from the Office of the Comptroller of the Currency (OCC). The OCC 2012-33 guidance directs institutions to use stress testing to "identify and quantify risk and loan portfolios and help establish effective strategic and capital planning processes."
For community banks, while there is an expectation to conduct stress tests, Sergienko explains that the extent to which it is performed and who sees the result are certainly different at a community bank versus a mid-size or large bank. If community banks and their board of directors can think of stress testing as a normal business practice, they can avoid over-complicating the process. He said, "Tie it into the budget and ask, what happens if things go well? What happens if things go poorly?"
Read the full article (subscription required) as Joe shares practical questions to ask senior management and the board.
Stress testing has been around since before the financial crisis, and it's not going away. There is still active regulatory guidance and specific community bank guidance from all three of the banking supervisors on this topic.
Head of Risk Management and Quantitative Analytics