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Stress Testing Capital

November 11, 2010

By Larry Martin

Not that most of us haven't had enough stress in the past the year, but now the Conference of State Bank Supervisors (CSBS) is recommending that all community banks undertake a stress testing approach for their business model.  Specifically, in the October 2010 white paper (attached) they say:

"The paper is issued based on the following policy statement approved by the CSBS
Regulatory Committee:
"While banks with assets greater than 10 billion are required to conduct stress testing
under the Dodd/Frank Act, community banks should also consider utilizing stress testing
as a part of their risk management framework.
Stress testing implementation should:
1. Be an industry driven solution;
2. Be designed to meet the risk management needs of the bank; and
3. Not be a regulatory exercise." 

The paper spends considerable time recapping the recent issues in the industry in terms of capital, concentrations, and community bank performance.  And while it does not reach any specifics, it ends with the following conclusions:

  • Risk management and governance practices need to become more comprehensive and forward looking.
  • Stress testing should be a fundamental part of this new era of risk management.
  • Pursuing broad based stress testing for the industry raises significant policy questions regarding the scope, application, and disclosure.
  • Industry leadership on the effective utilization of stress testing can and should get ahead of regulatory policy, demonstrating what is possible and realistic for community banks.

 So have a read and let us know what you think.  What's a little more self-inflicted burden on top of the 2,300 pound Dodd-Frank surprise package.

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