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Stress Testing Loan Portfolios

Stress Testing Commercial Real Estate and/or significant loan portfolios

For institutions with significant commercial real estate (CRE), agriculture or other concentrations, stress testing of the relevant portfolios can be conducted to provide bank management with an estimate of loss exposure under stressed market conditions including a significant decline in collateral or commodity values. The stress tests include assessing loan-to-value (LTV) ratios as well as the borrower’s ability to carry a loan with outside income or personal liquidity in the event of a market decline. The stress testing is designed to provide the bank with a list of loans with potential loss exposure under stressed conditions from the sample reviewed as well as an overall measure of the risk in the targeted portfolios under stressed conditions. This overall measure is expressed as a percentage of loans at risk of default or in need of restructure under stressed conditions and as a potential loss rate under stressed conditions. These percentages provide a basis for comparison to peer banks reviewed by DLS Consulting.

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