Finance Professor Develops Stress Test for Community Banks
Tim Yeager, finance professor at the University of Arkansas and former economist at the Federal Reserve, has created a macro stress test that community banks can use to assess their capital adequacy in times of financial crisis and recession.
The test, a macro-enabled Excel file, and supporting materials are free and available to all U.S. community banks. They can be downloaded at http://finance-dev2.uark.edu/community-bank-stress-test.php.
“Any U.S. community bank can utilize the resources I developed to build a customized macro stress-testing model,” said Yeager, associate professor in the Sam M. Walton College of Business. “The purpose of the model is to assess the bank’s ability to withstand a severe and prolonged period of high credit losses.”
Community banks are locally owned and operated financial institutions with assets less than $10 billion, although most have much less than this amount. Since 2009, the Federal Reserve has used macro stress testing – putting a bank through an adverse macroeconomic and financial shock – as its standard method for assessing capital adequacy at large banks. Although U.S. community banks are not specifically required by regulators to run macro stress tests, those with high levels of commercial real estate lending are required to stress-test their portfolios. Additionally, said Yeager, the banking industry has evolved since 2009 and incorporated stress testing as a routine part of risk management.
“My stress test model is a customizable Excel spreadsheet that provides realistic, worst-case, five-year forecasts,” Yeager said. “It imposes a surge in loan losses based on community banks’ actual charge-offs over 2008 to 2012, the five year horizon that captured the deterioration and recovery of bank balance sheets from the Great Recession.”
Independent Banker, a publication of Independent Community Bankers of America, recently published a story written by Yeager about his stress test and assessing capital adequacy.
Yeager holds the Arkansas Bankers Association Chair in Banking.