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Stress Tests – Effect of Higher Rates on Coverage Ratios

Financial Stress TestWhile interest rates are at historic lows, many lenders are mindful that rates will not stay low forever. Increasingly, they are concerned about their ability to measure the effect of future interest rate increases on coverage ratios. The objective is to be able to quickly and easily get an understanding of potential exposure and risk.

Their first effort is to simply identify when loans will reprice or mature with indications of:



With this information in hand, clients are able to identify situations where the coverage is thin and will be significantly adversely affected by higher rates. They can also identify any concentration of repricing in future time periods — for example, do a lot of loans reprice in three years?

Once the repricing schedule is available, analytics can be applied to it to automate measuring the impact on future coverage ratios.


While all the information necessary to perform this analysis is resident in most core systems, the ability to create reports that present the information and perform the analytics is more difficult to achieve. Systems that easily provide this information to clients allow them to better measure this component of credit risk.