“The main concern banks have had on this topic is the lack of transparency behind the stress testing process,” Shea Dittrich, the director of business development for financial markets at Sageworks, Inc., said, according to Forbes. “This guidance gives community banks more direction on where to start their own stress testing, and it reduces the level of ambiguity we were hearing about from banks.”
The OCC emphasized in its guidance last month that “community banks, regardless of size, should have the capacity to analyze the potential impact of adverse outcomes on their financial conditions,” though the agency did not endorse one particular stress testing method, ABA Banking Journal reports.
Various methods of testing exist, including transaction testing, portfolio stress testing, bottoms-up testing, top-down testing, enterprise-level stress testing and reverse stress testing.
In December, the OCC issued a booklet that included bank examination procedures and testing discussion, saying that “credit risk management does not conclude with the supervision of individual transactions” but “it also encompasses the management of….pools of exposures, whose collective performance has the potential to affect a bank negatively,” according to ABA Banking Journal.
The booklet provides a template example of the various types of testing.
“Whatever method a banker chooses for stress testing, at the end the results should be detailed in a comprehensive but concise narrative document that explains the exercise and the assumptions made during the exercise,” Michelle M. Lucci, a risk management consultant at Texas-based Bankers Toolbox, said, ABA Banking Journal reports. “This document should most importantly present clear, actionable intelligence which can be immediately put to good use.”