RALEIGH, N.C.–Stress testing, even for financial institutions not required by regulators to conduct such analyses, is a prime focus during financial institutions examinations, according to a new survey. But the primary focus remains on asset quality, the survey also found.
The survey of financial institutions for what they are currently experiencing during exams was conducted by Sageworks, and found that while many smaller banks may not be required to conduct formal concentration or portfolio stress testing to ensure capital will be adequate under various scenarios, they are facing regulatory pressure to do so.
The Sageworks Bank & Credit Union Exam Survey found that respondents, 99% of which had asset levels below $10 billion, are receiving encouragement or pressure related to stress testing. Sageworks said it found that 43% of institutions said they are already stress testing, and one-third said examiners pressured them to start or expand stress testing practices. A small number, just 3%, said examiners required stress testing implementation by the next exam.
Overall, Sageworks said the survey also found that financial institutions named asset quality as an area of great focus during their most recent exams by the Office of the Comptroller of the Currency (OCC), the FDIC, the Federal Reserve, and NCUA. In fact, 60% of respondents said asset quality was the top focus of examiners.
According to Sageworks, some of the asset-quality issues receiving criticism from examiners included:
- Failing to complete annual loan reviews.
- Inconsistency in how cash flow analyses were conducted.
- Stale loan-file documentation, appraisals and financial information.
- Handling of problem loans and TDRs.
- Concentration levels of commercial real estate.
- Risk-rating systems.
Respondents said that asset quality was also the area for which they were most prepared, in large part due to comments made during previous examinations.
Some participants in the survey also indicated that examiners had been critical of their institution’s interest rate risk model. NCUA, for instance, has repeatedly stressed its own concerns over CUs’ preparations for rising interest rates.
Representatives from 180 financial institutions participated in the online survey and represented a range of assets: approximately half had total assets of $75 million to $500 million; about 18% had assets ranging from $500 million to $1 billion; and 14% had assets of $1 billion to $2 billion. Eight percent of respondents had assets topping $2 billion.