Stress testing is an essential tool for community banks that want to navigate the COVID-19 economy safely and position their banks for opportunities down the road, Invictus CEO Adam Mustafa said on an April 15 webinar attended by 75 banks, accountants, consultants and bank examiners.
While no one knows exactly how the economy will change and when, proper stress tests that rely on loan-level data will give a directional guide to bankers, as long as the tests can be repeated often during the crisis. He said bankers should view stress testing as a powerful risk-assessment tool to triage their loan portfolios, understand the sufficiency of their capital, and develop meaningful contingency plans.
“Precision is a waste of time. You need direction. Speed matters. Repetition wins,” Mustafa said.
Stress tests that rely on investor-driven industries are irrelevant to assessing the impact of the pandemic economy. Reverse stress tests, which prior to the pandemic were rarely used, can also be helpful. It is essential for tests to be forward-looking, while analyzing the most vulnerable loans in a bank’s portfolio. The proper stress tests can also help banks identify which Q-factors they should use to assess their allowance for loan losses.
Mustafa told attendees that stress testing is not about satisfying regulators, but it’s rather a “living breathing stress testing and capital management system.” He said bankers are operating in a dark tunnel. Stress testing gives them a better flashlight to see the pitfalls that lie ahead, allowing them to adjust course and move faster through the hazards.
He also said periods of disruption also create opportunities. Better prepared banks can take advantage of those opportunities to succeed in the future.
To view and listen to the complete webinar, please click this link.
