Proposed Guidance on Stress Testing: A Valuable Reminder for All Community Banks

Manatt, Phelps & Phillips, LLP

Although ignorance may be bliss some of the time, community banks with assets under $10 billion are at significant risk if they ignore the June 2011 joint regulatory proposed guidance (and ultimately, the final guidance) on stress testing. Officers and directors of smaller institutions would be hard-pressed to disagree with the proposed guidance’s cautionary statement that all banking organizations must have the capacity to understand the potential impact of stress events on their financial condition.

Though specifically directed at institutions with assets in excess of $10 billion, the principles set forth in the proposed guidance will undoubtedly find their way into the work of regional examiners who will look askance at institutions that do not have an adequate stress-testing framework in place. At the end of the day, however, banking organizations should be motivated to review and implement provisions of the guidance not because of the potential supervisory impact, but instead because the guidance sets forth broad principles any organization will find helpful in effectively assessing and addressing risks.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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