OCC Provides Stress Test Guidance for Community Banks

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On October 18, the OCC issued Bulletin OCC 2012-33, which provides guidance to community banks with assets of $10 billion or less on how to implement stress testing to assess risk in their loan portfolios. Stress tests are exercises designed to gauge the potentially adverse impact that a hypothetical scenario might have on earnings, loan loss reserves, and capital levels. The OCC reiterated that stress testing procedures for smaller community banks do not need to be as sophisticated as those used by larger national banks, but noted that all banks are expected to assess their capital adequacy in relation to overall risks and to have a plan for maintaining appropriate capital levels. The bulletin also included explanations of specific types of stress testing, a sample method for performing stress tests on a basic portfolio, and a table of common real estate characteristics that should be considered when evaluating the impact of a stress event on specific property types. Additionally, the OCC announced the availability of a new tool for performing stress tests on income-producing commercial real estate loan portfolios. The OCC plans to host a teleconference for bankers on December 3, 2012 to discuss this new guidance.