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Stress Testing: Are Mid-Sized U.S. Banks Joining the Dots?  

April 23, 2014

Kenneth Yu, BankTech

It has been more than a year since the top tier US banks began running macroeconomic capital stress tests on their balance sheets as a result of Dodd Frank. For the small- to medium-sized banks now facing similar stress test requirements, it is critical that they consider the strategic link between these capital stress tests and their own credit rating models. Many of the smaller banks with under $50 billion in assets have so far relied on portfolio- or segment-level net charge-off approaches to stress their loan portfolios that are quick to implement and answer immediate regulatory concerns. However, more sophisticated and granular approaches will be needed at some point in the future.

This will have major implications on the way that banks risk rate their credit borrowers because one of the best ways to implement a loan level stress testing approach is to leverage the bank’s existing data driven credit rating models. This will not only put the results in the right context, but also appease regulators that want stress tests to be run as an ongoing part of the business rather than just as annual reporting exercises.

Read more: BankTech

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