Stress Testing and Credit Risk Ratings: Are Mid-sized U.S. Banks Joining the Dots?

A version of this blog post originally appeared in Bank Systems & Technology. It has been more than a year since the top-tier U.S. banks began running macroeconomic capital stress tests on their balance sheets as a result of Dodd-Frank. For the small- to medium-sized banks now facing similar stress test requirements, it is critical that they consider the strategic link between these capital stress tests and their own credit rating models. Many of the smaller banks with less than $50 billion in assets have so far relied on portfolio- or segment-level net charge-off approaches to stress their loan portfolios that are quick to implement and answer immediate regulatory concerns. However, more sophisticated and granular approaches will be needed at some point in the future.