Portfolio and Loan-Level Stress Testing: Be Proactive & Examiner-Ready

Regulators are increasingly mandating stress testing, particularly at the loan-level, with growing expectations for community banks to take a more proactive approach. 

This is particularly true in the area of commercial real estate (CRE) lending as deteriorating credit conditions have heightened the need for community banks to justify their strategy to continue growing these portfolios. In addition, as a nationwide loan review services provider, we’ve noted more borrower risk downgrades this year than we’ve seen in a decade. 

For these reasons and more, banks continue to search for easy and affordable ways to comply with regulatory expectations. 

The purposes and benefits of credit stress testing. 

Stress testing helps banks evaluate lending risks and gauge capital adequacy requirements resulting from stressed conditions. Regulators confirm that this exercise in plausible foresight can be an effective risk management strategy. “Experience from bank examinations suggests that community banks that proactively manage their lending function and attempt to plan for, measure and control their vulnerability to adverse events have been better able to make adjustments and improve performance over time.” (FDIC Supervisory Insights).   

Stress testing methods meet heightened expectations. 

While portfolio-level stress tests provide valuable capital information, there is a growing consensus that both portfolio-level and loan-level stress tests should be conducted for a more comprehensive view of risk.  

Portfolio-level Stress Testing

Fortunately, there are portfolio-level stress testing tools available that are fully-automated and examiner-ready. With our affordable QwickAnalytics® solution, you instantly see results as soon as you launch the tool, with no need to input detailed historical or peer data. It’s fast, powerful, and customizable, designed to make your top-down stress testing seamless and efficient—informing you of your bank’s capital cushion and helping you pass regulatory scrutiny. 

Loan-level Stress Testing – Performed for You 

The resource- and data-intensive nature of loan-level stress testing presents considerable challenges. Using your bank-specific data, the credit specialists at IntelliCredit® can handle your loan-level stress testing for you, eliminating costly look-back studies. Our methodology uses Probabilities of Default (PD) and Loss Given Default (LGD) for more accurate, portfolio-specific results compared to historical net charge-off methods. IntelliCredit tailors stress test scenarios to your bank’s needs and risk tolerances across different loan segments, identifying the most vulnerable loans and borrowers to illustrate potential impacts on capital positions under stressed conditions.  

Combining Loan Review and Loan-level Stress Testing 

Loan review arguably has the most “real-time” perspective of a borrower’s current circumstance, off-setting risks of relying on potentially out-of-date initial credit underwriting data. At IntelliCredit, we offer a sensitivity stress test on a subset portfolio, concurrent with a broader loan review, to identify loans and borrowers most at risk.  

Final thoughts 

There is no single way to stress test. Customize your approach by providing a wholistic view of the impact from adverse events with a portfolio-based test, while also conducting loan-level analysis to better understand risk in specific areas of your portfolio. QwickAnalytics® and IntelliCredit® offer practical, defendable and affordable stress testing tools that can help banks more easily comply with regulatory expectations. 

To learn more, contact us at 800.285.8626 or visit qwickrate.com.