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Now Regulators want Stress Tests to be Applied at the Loan Level!

Until recently, stress tests were used in the Asset/Liability Management process at the bank level. However, now the regulators want these tests to be applied at the loan level, especially for commercial real estate (CRE) loans. Regulatory guidance on CRE concentrations calls for stress testing of CRE portfolios. These stress tests must determine the impact on capital of varying assumptions about commercial real estate variables. Institutions are supposed to stress individual loans as well as entire CRE portfolio. However, guidance does not provide specific minimum expectations for these tests. That means institutions must understand how to structure these tests and how to interpret the results.

In Stress Testing Commercial Real Estate Loans: Complying with Regulatory Guidance our expert will give you insight so that you can be sure you are meeting specific regulatory expectations for stress tests. It is vital that your institution understand how to structure stress tests and how to accurately interpret the results based on the following types of stress tests.

• Transactional Sensitivity Analysis
• Stressed Loss Rates
• Scenario Analysis
• Stressing Ratings Migrations

Our expert will go over the following factors that should be stressed according to regulatory guidance:

• How to subject CRE loans to stress testing scenarios to determine exposure to changes in interest rates. This includes identifying changes to base rate indexes in loan contracts and adjusting these rates based on stress testing scenarios.
• How to stress various loan variables and assess the financial impact of these changes on future profits and collateral values. Examples of variables include gross income, vacancy rates, and operating expenses or debt coverage ratio components such as net operating income (NOI), debt payments, interest rates, amortization, loan-to-value and capitalization rate.
• How to identify the impact of other types of stress tests such as testing:
• Declines in market values.
• The impact of increasing loss rates.
• The impact of declining internal loan review ratings.
• Mitigating factors to consider in preparing or evaluating stress tests.
• Identifying the data you need to conduct meaningful stress tests.
• Evaluating the accuracy of the loan data used.
• Identifying outside factors that should be considered in stress tests.
• Integrating stress tests into the allowance for loan and lease losses decision process.
• Using stress tests to identify loan concentrations.
• And more!

About Our Speaker

Gary M. Deutsch, CPA MBA CMA CBA CIA has worked extensively with financial institutions in audit, lending, financial, and operational areas. He has served in senior positions for regional banks as VP of Finance, Real Estate Loan Officer and Senior Audit Manager. Mr. Deutsch served as a consultant to financial institutions in strategic planning, profit improvement, financial management, and merger- and acquisition-related studies while working at KPMG. He was the CFO at a start-up bank, where he organized the accounting, finance, and investment functions to manage significant growth.

Mr. Deutsch is the President of BRT Publications LLC, a professional authoring company serving the financial industry. Some of his published works for AlexInformation include ALM Management Manual, Loan Procedures Manual, Practices and Procedures for Financial Institutions Risk Management, Bank Controller’s Manual, Internal Audit Procedures Handbook, and Risk-Based Audit for Financial Institutions.

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