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Stress Test Filtering


Financial Stress Test Filtering

Stress testing the commercial loan portfolio has been an important function for many years. Increasingly, we find clients are stress testing more granular subsets of the total portfolio. Here are some of the criteria we find clients using. See if any would make sense for you. The easier it is to select the desired sub group the more likely you are to conduct more granular analysis, and the less staff time is required to get the desired result.

Department and Broad Portfolio Types. These are very broad categories such as commercial real estate (CRE) loans, C&I loans, construction loans, asset based lending, etc. In many cases there is a lot of overlap between departments and portfolio types. Not only would the appropriate stress values differ, but the particular ratios that you many want to test will differ. For Example, you may want to stress LTV and DSCR for CRE loans but DSCR and loan interest rates for C&I.

Geographic Criteria. Different markets and geographic areas may have substantially different economic conditions, some may be strong while others quite weak. Geographic criteria would include region, state, market or city.

Collateral or Loan Type/Loan Category. Needless to say, different collateral and loan types exhibit quite different risk characteristics.

Loan Programs.  Loan programs may be directed at different customer groups and/or have different terms and structures that merit separate analysis.

Origination Period. Loans originated in periods when underwriting criteria were especially aggressive may exhibit heightened risk.

Participation Loans. Purchased participations were originated by another lender, so even though your organization also reviewed the underwriting of the loans, servicing will be by another lender and they will have more direct contact with borrowers and performance information. And Participations sold, while underwritten and serviced by your organization, may be larger implying worse consequences if they go bad but they may also have been underwritten against more rigorous criteria. Either way, the ability to look at participation loans separately from the rest of the portfolio is valuable.

Rate Reset Dates and Indexes. The particular characteristics of floating rate loans give rise to risks associated with higher loan payments if interest rates increase. The ability to easily identify situations where variable rate loans may reprice upward and evaluate the resulting potential DSCR is also valuable.