5 Reasons for Capital Stress Testing … Required or Not



Does your credit union consider capital stress testing as a “might consider” rather than a “must do”? That line of thinking could be undermining your CU’s success. Discover why such testing is an important exercise for financial institutions of any size and how to conduct it to maximum effectiveness.

How can busy executivesensure the most effective use of their time? By categorizing their priorities, that’s how. Most of us follow some form of this useful practice: Make a list of projects and initiatives that we “must do,” “might consider doing” and “don’t need to do.” For many, capital stress testing often falls into the second category. While the largest credit unions must regularly perform capital stress testing, many that don’t fall into that CU class wonder about the tradeoff between the time and value of this task.

Financial regulators require capital stress testing for institutions with more than $10 billion in assets, but we’ve found it to be an important exercise for financial institutions of any size. Annual stress tests aim to ensurefinancial depositories have enough capital to withstand a severe economic downturn, including the ability toquickly adjust their balance sheets.

A brief history

Capital stress testing for larger institutions came out of the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” which resulted in the Dodd-Frank Act Stress Testing (DFAST) regulation. Hence, the NCUA requires federally insured credit unions with $10 billion+ in assets to submit capital plans and perform capital stress tests. In concert with Dodd-Frank, the Federal Reserve Board created the Comprehensive Capital Analysis and Review (CCAR) rule, which applies to bank-holding companies with assets of $50 billion or more.

Why conduct stress tests?

Right now, only a handful of credit unions meet the$10 billion threshold, with another handful getting close. Perhapsmany of those below that mark have breathed a sigh of relief that they don’t have to expend the effort and expense of stress testing.Admittedly, creating scenarios to adequately test and report capital adequacyadds to credit union CFOs’ already full plates.

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