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Per OCC Bulletin 7556-96 , "Interagency Guidance on CRE Concentration Risk Management," banks that exceed certain CRE concentration thresholds are expected to use more robust stress testing practices to effectively manage the concentrations and maintain adequate capital. The OCC's new stress test tool for income-producing CRE loan portfolios is available on the OCC's BankNet website along with other tools banks may use to stress test other types of loans. Appendix C contains an example of factors to consider when conducting CRE loan stress tests or sensitivity analyses.

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Loan migration analysis can be used by banks with larger portfolios and more comprehensive internal databases to evaluate how a downward migration in internal loan ratings, consistent with migrations that might be expected during adverse economic conditions, would impact asset quality, earnings, and capital. This analysis would also assist banks in determining possible actions to address potential deterioration in their portfolios.

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The Office of the Comptroller of the Currency (OCC) is issuing Bulletin OCC 7567-88, "Community Bank Stress Testing: Supervisory Guidance," to provide guidance to national banks and federal savings associations (collectively, banks) with $65 billion or less in total assets on using stress testing to identify and quantify risk in loan portfolios and help establish effective strategic and capital planning processes.

If the results of a stress test indicate that capital ratios could fall below the level needed to adequately support the bank's overall risk profile, the bank's board and management should take appropriate steps to protect the bank from such an occurrence. This may include establishing a plan that requires closer monitoring of market information, adjusting strategic and capital plans to mitigate risk, changing risk appetite and risk tolerance levels, limiting or stopping loan growth or adjusting the portfolio mix, adjusting underwriting standards, raising more capital, and selling or hedging loans to reduce the potential impact from such stress events.

This component is an estimate of the additional provision expense necessary to maintain the ALLL at an adequate level at the end of the stress period. In stressed environments the risk in the loan portfolio increases significantly causing a need for a higher ALLL. Management can use its experience during recessionary periods to estimate an appropriate ending ALLL. The incremental amount of provision expense necessary to maintain the ALLL at an adequate level is entered on this line.

Community banks, regardless of size, should have the capacity to analyze the potential impact of adverse outcomes on their financial conditions. The OCC's guidance describes various types of stress test methods that community banks may use and provides one example of a simple stress test framework to consider. The OCC encourages community banks to adopt a stress test method that fits their unique business strategy, size, products, sophistication, and overall risk profile.

For most community banks, a simple, stressed loss-rate analysis based on call report categories may provide an acceptable foundation to determine if additional analysis is necessary. Banks should primarily focus on concentrations of credit or loan portfolio segments that are significant to the overall business strategy. A community bank may be able to examine on a single spreadsheet its key assets and liabilities and link these to income and funding requirements. The loss stress rates used may be derived from a review of historical loss experience during previous stressful periods, historical market experience, or other estimates. 5 Appendix B contains an example of this type of stress test method.

In broad terms, stress testing can refer to many different types of methods and applications, including transaction stress testing, portfolio stress testing, enterprise stress testing, and reverse stress testing. A bank can use a variety of stress test methods to evaluate loan portfolio risk and the potential impact on earnings and capital based on its unique risk profile.

OCC rulemakings are also available at the Federal Register website, and at , where you can search (by Docket ID, keyword, or date range) for public comments to OCC rulemakings.

Without admitting or denying the SEC’s and CFTC’s findings, OCC agreed to pay a combined $75 million in penalties ($65 million under the SEC’s order and $5 million under the CFTC’s order) and hire an independent compliance auditor to assess its remediation of the violations and subsequent compliance efforts. The respective orders detail the charges and undertakings, as well as cooperation and remedial efforts that the SEC and CFTC considered in accepting OCC’s offer of settlement.

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