ABA Banking Journal - July 2009 - (Page 26)
COVER STORY forward looking in the end, says Dan Borge of LECG. “We just proved that with the financial crisis,” Borge explains. “Everyone was looking at five years of past data, which was calm water. And then the storm came. The economy is always changing. You’ve got to drive by the radar screen, not the rear-view mirror.” • Prepare for a reality check. When you stress your loan portfolio, you may find potential trouble that hasn’t so much as shown the top of its head, yet. “People assume that when their loan losses are low, they don’t have bad loans,” says Michelle Gula, president and CEO of m.rae resources. However, she says, this may be testimony to longstanding customer relationships and staff skilled at working them. Banks that have lots of one-off loans in their portfolio will also find surprises. Gula’s business associate, Jay Brew, points out that when the smoke clears from the current cycle, many problems will turn out to have been rooted in exceptions made to loan policy. • Include the board. “We’re all more inclined to react to things presented to us in concrete terms,” says Ernst & Young’s Don Vangel, “rather than in broad, conceptual terms.” Stress tests represent a strong technique to get the board focused on major challenges for the bank, he adds. • Commit to an ongoing process. The effort necessary to perform stress testing properly, and its potential value, require a long-term devotion to stress testing. “This is a continuing process, a necessary part of the banker’s tool kit,” says Peter Davis of Ernst & Young. “It’s not a oneoff exercise.” • Recognize that stressing out separates you from the pack. Jay Brew suggests that bankers that decide to adopt regular stress testing will see themselves as leaders, for the time being. “The typical bank isn’t going to lay out the money to do anything that they don’t have to,” says Brew. Banks out in front can make use of this, as did Koelmel’s First Niagara. • Don’t go overboard. A last caution comes from those who warn that it is possible to botch the stress test challenge, instead of doing the bank good. Darling’s Mike Guglielmo, for instance, warns that being overly conservative could push the bank into taking actions that would be limiting, or worse, in the end. Similarly, stressing for the bank’s own worst-case scenario, and basing future actions on that, “is overkill,” according to FinPro’s Nick Ketcha. “I don’t feel that that’s warranted. We’re not saying that that you have to raise capital to face Armageddon.” And there is always the risk of getting the analysis plain wrong. “If you do this badly,” says LECG’s Dan Borge, “you can mislead yourself as to what the risks were.” But Borge also cautions against aiming for stress test perfection. You’ll never do it, because there are always new factors to consider. Concentrate on getting the process you have right, not on hitting a “10.” BJ 26 JULY 2009/ABA BANKING JOURNAL Subscribe at www.ababj.com
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