SCAP: FRB Risk Management Expectations for Community Banks

Legislation from the Supervisory Capital Assessment Program were enacted in good faith as a way to decrease financial instability in the market. As you are aware, the regulatory efforts have made it considerably harder for local banks and credit unions to operate efficiently.

While community banks are not required or expected to conduct the enterprise-wide stress tests required of larger organizations, however, it may find the implementation of an effective stress-testing process will help the board and senior management better understand the potential impact of adverse scenarios.

How SCAP Affects Community Banks

Following the financial crisis, concerns surrounding the fundamental value of loans held on banks balance sheets and the effect of market illiquidity and volatility on asset valuations resulted in widespread uncertainty. SCAP stress testing was introduced to ensure that financial institutions would have sufficient capital available in the event of an adverse outcome.

To implement this risk assessment, banks need to apply a wide range of inputs including internal estimates, supervisory model outputs, data collected from banks, and supervisory judgment to produce accurate estimates of loss, revenue, and capital. In addition, Dodd Frank requires the Federal Reserve to conduct regularly scheduled supervisory stress tests under three scenarios: baseline, adverse, and severely adverse. The Act’s 22,000 pages of rules and regulations, which includes the need to implement risk modeling software to effectively manage portfolio risk must be followed in order to remain compliant. As a result, compliance costs have increased for roughly 90 percent of banks.

Conducting regular risk assessment internally is critical to accurately analyze the health of a bank’s loan portfolio. For community banks who want to comply with existing regulations, without going over budget or reducing services, CLOUDecision makes compliance easy and affordable.

You May Benefit From the Following Sound Practices:

Governance & Controls
– Board & senior management establish expectations
– Policies describe and set forth purpose, frequency, and range of actions for results
– Components of the analytical approaches, both quantitative and qualitative, are fully documented and transparent
– Scenarios are justified in the context of the current economic and financial conditions
– Independent evaluation of the program and model
– Controls are set to verify data inputs and review the accuracy of outputs

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INPUTS
– Bank considers a range of differing degrees but plausible scenarios
– Key assumptions defined
– As conditions change, assumptions and scenarios are reevaluated
– Bank considers which scenarios might threaten viability
– Bank should use their own experience whenever appropriate
– Gaps in data quality are identified and action plans are developed to remediate

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CLOUDecision is committed to providing affordable and agile financial analysis solutions for community banks and credit unions. The easy-to-use, on-demand platform can be customized to meet the exact needs of your institution and guarantees compliance. For more information or to schedule a demo, contact us.