Capital planning and stress testing

first_imgAs the first round of NCUA supervisory stress tests are being completed, NCUA’s capital planning and stress testing rule for the largest credit unions might have you asking if you should be doing capital planning and stress testing too. Even if you are not a federally insured credit union with assets of $10 billion or more, it’s reasonable to ask if it’s a good practice.Understanding risk exposures and being structured to survive a certain level of risk is key. All credit unions do some form of capital planning via their budgeting process (although not at the rule’s level), but stress testing is often lacking. If you’re interested in performing NCUA’s stress testing, they publish stress test scenarios for baseline, adverse and severely adverse scenarios. These are macro-economic scenarios that include the unemployment rate, market interest rates, GDP, etc., and must be translated into assumptions that affect the credit union’s projections.NCUA is conducting the stress testing for the first three years and results aren’t public at this time. But the Federal Reserve’s approach to stress testing for banks, which NCUA’s stress tests were modeled after, shows that those macro-economic scenarios are turned into stress test assumptions by using the financial institution’s data, historical information and other regional and national data. If it’s overwhelming to think about creating assumptions for individual loans, step back to the bigger picture. The Federal Reserve’s emphasis is on how such assumptions should be justifiably tied to the economic stresses being modeled, rather than loan-level detail. In fact, banks commonly model portfolios segmented by such characteristics as product line, lien position and sometimes down to loan-to-value and credit score for material portfolios rather than at the individual loan level. continue reading » ShareShareSharePrintMailGooglePinterestDiggRedditStumbleuponDeliciousBufferTumblrlast_img read more