Lessons from the Field: How Three $1B+ Community Banks Are Using Pandemic Stress Testing to Manage Strategy, Risk and Capital

Pandemic stress tests are helping banks manage concentrations, while also reassuring boards and management teams that they can withstand the economic fallout from the coronavirus, three community bankers revealed on a December 3rd Invictus Group webinar.

The hour-long “Lessons from the Field” webinar, which can be viewed in its entirety, featured a wide-ranging and frank discussion of how Invictus capital stress tests are helping each bank, whether it’s to assess an acquisition, create a risk appetite statement, prepare regulators, create strategic plans, manage growth, or integrate CECL into the bank.

Brian Grote, First Vice President, Risk Analytics, at Marquette Bank ($1.8 billion), “a highly concentrated” but low risk bank outside of Chicago, said the pandemic stress tests gave “our directors and everybody on our management team just a better view of where we were heading.” The bank was able to pinpoint which loans to watch and adjust migration values for those that would be hit most by the pandemic fallout.

Duncan Smith, CFO, CFG Bank ($1.6 billion), Baltimore, said his bank integrates Invictus stress test results with its budget and forecasts to get a handle on the bank’s true risks. He noted that the bank passed a CCAR-style test with “flying colors” but when the pandemic stress was added, the bank passed with a slimmer margin. “You can see the difference…and you can quantify what that extra risk is,” he said. The report is useful for management, auditors, regulators, and the board, he said.

Mike Valente, Enterprise Risk Officer, Kearny Bank ($6.7 billion) in Kearny, NJ, said his bank has used stress tests for several years, relying more and more on the twice-a-year results to help steer the bank. “Our reliance and use of the model have expanded as we’ve used it,” he said.

As unemployment rates began to rise and economic indicators began to fall, Valente said he realized how important a pandemic stress test would be to the bank. “This is where the rubber meets the road to use a hackneyed cliche of theoretical meeting reality,” he said. “This went from a nice pat-ourselves-on-the-back moment every time we delivered the results to our board to, we really need to get these results, we really need to tear through them, we really need to look at them, we need to understand what this means for us.”

The results came in time for the bank’s September board meeting. “From a strategic macro-perspective, everyone was more comfortable after the fact than they were before,” he said. “The story became here’s what we can expect…and that really brought everyone’s focus on the stress test to something that could be a very functional tool in the toolbox.”

Smith noted that community banks under $10 billion are not required to have capital stress tests. “But the regulators really like when they get it,” he said. “So even though it’s not required, you know, I’d say any community bank that doesn’t have one should consider starting to do one.”

Click here to listen to the entire “Lessons from the Field” webinar.