Pub. 1 2020 Issue 5

15 ISSUE 5 | 2020 prolonged downturn,” Hammond said. “Credit risk and the resulting impact is going to be a focus in every safety and soundness exam, and if you want to inspire confidence, your financial institution will already have conducted stressed capital planning.” Financial institutions need to determine whether updated scenarios may affect capital ratios so that management and the board can have assurances they will remain within “well-capitalized” levels, within management targets, or within targets tied to future strategic planning. These ratios also affect the institution’s CAMELS (Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to market risk) rating, which can have multiple impacts on an institution and its plans. Because of the limited capacity to develop new assumptions and conduct stressed capital assessments while handling day-to-day operations, many financial institutions are turning to external advisors for assistance. “There are most certainly resource and staffing constraints,” Hammond said. “Right now, it’s like everyone’s anthill has been stepped on. Everyone’s managing the relationship, modifications and covenants, and they don’t have time to generate a legitimate capital plan and stress test under multiple scenarios.” One model is key to accurate capital, allowance forecasts When seeking assistance outside the financial institution, Hammond said, bank and credit union executives should consider utilizing the same advisor for any stress testing or credit-focused capital planning as they use for allowance of loan and lease losses to avoid producing irrational allowance estimates. “Using the same model to produce estimates for your allowance and to produce results for stress tests is the best way to make sure your projections are meaningful,” he said. The alignment of critical assumptions and inputs is fundamental to developing accurate forecasts. Hammond said financial institutions working with an experienced advisor would be able to meet their needs for assessing capital this year while acquiring the tools to handle capital analysis and stress testing on their own in the future — even, as Hammond put it, “during stepped-on- anthill times.”  Mary Ellen Biery, Senior Writer and Content Specialist, at Abrigo. Abrigo is a leading technology provider of compliance, credit risk, lending, and asset/ liability management solutions that community financial institutions use to manage risk and drive growth. Visit intouch to learn more. Visit CBA Online Follow Shawn on twitter@Shawn_CBAK