With adequate stress testing, you can prepare your bank for whatever potential risks may be in your portfolio and how they impact liquidity and capital. 4. Dig Deeper: Beyond surface-level analysis, delve into the intricacies of revenue sources, economic uncertainties and your customer base. Investigate how urban migration impacts residential landlords and associated cash flows, and assess the sensitivity of your customers’ business models to higher interest rates. Comprehensive analysis enables proactive risk mitigation and strategic decision-making. 5. Earnings Challenges: When assessing credit stress, keep earnings forecasts in perspective, considering the industry’s evolving landscape. Rising deposit costs coupled with softer commercial loan demand pose challenges to net interest margins. While interest income on loans may increase, higher costs on Federal Home Loan Bank (FHLB) advances and overnight borrowings offset these gains. Anticipating earnings challenges allows for proactive measures to maintain profitability. 6. Liquidity: Amidst credit risk considerations, liquidity management is paramount, particularly in turbulent market conditions. Many businesses face unexpectedly higher expenses, inflationary pressures and competition for workers. Developing a plan to protect liquidity against the potential movement of funds between institutions and market uncertainty will help increase financial stability during challenging times. In conclusion, proactive stress testing enables community banks to navigate market fluctuations and safeguard their capital and liquidity. With adequate stress testing, you can prepare your bank for whatever potential risks may be in your portfolio and how they impact liquidity and capital. To continue this discussion or for more information, please contact Jay Kenney at jkenney@pcbb.com or visit pcbb.com. Dedicated to serving the needs of community banks, PCBB’s comprehensive and robust set of solutions includes cash management services such as Settlement and Liquidity for the FedNow Service, international services, lending solutions and risk management advisory services. 11
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