American Banker quoted Manatt's Craig Miller, co-chair of the firm's Financial Services & Banking Practice, on why stress testing benefits banks.
American Banker reports that the Dodd-Frank Act requires banks with at least $10 billion of assets to conduct annual stress tests. Although many banks already have some sort of process to begin testing, other banks are worried that testing could become mandatory for everyone. However, industry insiders told the publication that bankers that forgo testing are making a mistake. All community banks should have some form of stress test.
"It is part of good prudent management to assess your financial institution's stability," said Miller. "It is about really understanding what the bank is doing and the economic impact of different scenarios."
Previously, banks were more focused on finding out how changes in interest rates would influence their bottom lines, Miller said. Since the financial crisis, banks have started to examine how economic conditions will affect their loan books and whether they have too much concentration in one area, he added.