At P&G, we understand the impact of evolving regulatory and economic emphases on community financial institutions. While institutions were looking at the historical data to assess future credit risk, the economic waters have changed. A storm has hit the industry which emphasizes the need for us to manage risk by looking ahead and not through our rearview mirror.
Why do we stress test? When you stress your loan portfolio based on a set of variable assumptions, you are trying to assess the impact that the change of such factors will have on your capital, earnings and balance sheet. Thus, the impact of a well defined credit stress test is to quantify the variability of risk under changing conditions. P&G’s credit stress test service is specifically designed for small community banks and looks at the entire loan portfolio to assess your bank’s capital adequacy and to evaluate risk arising from specific concentrations.
The biggest hurdle to stress testing is that, for many, it is a new concept with a learning curve. There are few experts or tools available to facilitate training, so working through the learning curve can be difficult. Our experience and dedicated industry focus over the past two decades of working with small community banks provides us with a unique insight and understanding of your needs. We recognize the limitations of existing core service systems to generate data in a meaningful way. Thus, our process is specifically designed to work with your available existing resources to produce results and a report which can be presented to the Board of Directors and regulators. We use your existing Call Report data, along with your system generated regulatory report of the loan portfolio and budgets or business plans. This information is interfaced into our stress test model to run several “what if” scenarios.
While credit stress testing is not specifically required by regulators for small community banks, many institutions understand that the risk of not proactively analyzing such information in today’s economic and regulatory climate can be devastating. It is clear from regulators’ comments regarding bank failures that they are developing new tools for analyzing banks. If your bank is not being proactive in finding potential inherent weaknesses through tools such as stress testing, regulators may find them for you. The results of recent regulatory exams have clearly demonstrated that your bank will not be examined and assessed based on where it is now, but where you are going to be in the near future.
Our Credit Stress Modeling process is unique for the following reasons: