In Tough Times, the Tough Stress Test
In times of stress, small banks turned to stress tests.
That’s my biggest takeaway from Bank Director’s 2021 Risk Survey — especially when I compare it to surveys done in previous years.
It’s a gross understatement to say that the coronavirus pandemic was a major stressor for banks of all sizes. Stress tests — performed annually or at an even more-frequent interval — were one tool that regulators and executives used to identify and contain those risks.
The pandemic’s timing coincides with a trend of increasing stress testing in the industry: 82% of respondents in the 2021 Risk Survey say their bank conducts a stress test annually, compared to 75% the year prior. Of that 82%, 60% reported expanding the quantity and/or depth of economic scenarios they ran in response to the pandemic.
Banks between $1 billion and $10 billion in assets stand out. Last year, 76% of respondents at banks in this asset range reported conducting an annual stress test; this year, that number increased to 89% of respondents.
TBK Bank SSB, a subsidiary of Dallas-based Triumph Bancorp, is one of those institutions. Regulators don’t require the $6 billion bank to stress test, but it uses the exercise to ascertain its credit risk and capital sufficiency. It has niche lending lines like factored receivables and equipment finance that can carry higher or different credit risks, says Erika Keller, the bank’s treasury vice president.
TBK Bank ran multiple stress test scenarios to gauge the pandemic’s potential impact on the bank’s credit and reserves in the first half of 2020, bolstering the bank’s allowance for credit losses and raising additional capital in response. In the second half, the bank added liquidity analysis to the exercise, establishing potential sources of external liquidity if excess deposits exited the bank.
Keller says it was tough to conduct so many tests in a year defined by economic stress, with outlooks and forecasts that seemed to change daily. But, she says, the exercises were a source of comfort during last year’s craziness. Executives could build guardrails to prevent the worst-case outcomes, because they knew what those outcomes looked like.
“2020 wasn’t quite a ‘black swan’ event,” Keller says, “because I think people knew that there was a possibility that there could be a widespread pandemic. But it was the closest thing to a black swan event that I have ever seen. Running these scenarios did give us comfort, but it also challenged our thinking … outside of the normal framework and the normal box.”
• Kiah Lau Haslett, managing editor of Bank Director