Stress-testing do’s and don’ts

About a year ago I was asked by CSBS to participate in their first ever, “Stress-testing for Community Banks forum”.  It was being hosted by the Kansas City Federal Reserve and I was one of three invited vendors.  My seventy-five minute presentation was listed on the program as, “Vendor Demo #1”.  While I was very honored and grateful to be part of the program, being teed-up like a plaid jacket for a demo in front of 140 bankers and examiners sounded a bit too salesy for my tastes.  And lets face it, audiences tend to be a little drowsy right after lunch.  Talking about stress-testing would be nothing short of providing a sleeping pill.  I also figured that most of the bankers in the room were already using an Asset/Liability model of some sort so the prospect of generating any direct sales was slim.

Instead of a sales demo my staff and I designed a presentation that we thought would be a bit more interesting to the group.  Over our company’s 40+ years in the modeling business we’ve accumulated some valuable institutional knowledge about stress-testing.  We decided that a presentation on pointers or “things to remember” about stress-testing would provide a better take away than just a straight-up sales demo.

The result was a well received program (based on audience feedback) that highlights the “Do’s and Don’ts of stress-testing”.  There’s a link to my handout on the right-hand side of this page.  I’ll be sharing the basics of the presentation here on my blog by discussing each of the following items in more detail:

Do…	Don’t…
know what you are measuring leverage existing systems summarize/benchmark the results identify major assumptions try to isolate variables know what assumptions are based-on	obsess about what’s realistic think you can predict it uses a “one-size-fits-all” measurement obsess over precision run more than a handful of tests expect a right or wrong answer

Also, I’d to thank Mike Stevens and the folks at CSBS for asking me to be a part of their program.  Without that motivation we probably wouldn’t have developed this presentation.  I’d also like to thank the audience members who listened to me speak and provided feedback on the content:

• Dec 2010 – CSBS at the Kansas City Federal Reserve
• Mar 2011 – North Carolina Banker’s Association in Raleigh, NC
• Jun 2011 – CSBS and the Kentucky Bankers & Kentucky DFI in Covington, KY
• Jun 2011 – Iowa Division of Banking in Des Moines, IA
• Jul 2011 – CSBS at the Chicago Federal Reserve
• Aug 2011 – CSBS at the Richmond Federal Reserve
• Aug 2011 – CSBS at the Atlanta Federal Reserve
• Oct 2011 – Arkansas Community Bankers in Little Rock, AR
• Nov 2011 – Pennsylvania DOB in Harrisburg, PA

- Update -

• September 2012 – Maryland state bank examiners in Baltimore, MD
• October 2012 – CSBS, GSBC at the Bank Directors Seminar in Coeur d’Alene, ID