Community bank proactive risk management: Concentration management, stress testing and capital planning

The effect of the aftermath of the economic downturn of the past five years has been hugely significant for community banks in the United States. Along with hundreds of bank failures, consolidations and a squeeze on margins and profits has come an onslaught of new regulatory advisories, controls and guidance. Responding to pressure from the public, press and legislature, US bank regulators and their agencies have scrambled to put in place new comprehensive safeguards to try to prevent another similar crisis. Community bankers are overwhelmed with the volume and complexity of new rulemaking and suggested best practices, having been already shell-shocked by the staggering impact of the economic crisis and its effects on their customers, local businesses, real estate valuations and home buyers. New regulations, rules and best practices being put in place for lending and credit risk management include ‘forward looking’ more proactive measures and processes. They are challenging the ways that community bankers have always managed their portfolio risk, and forcing them to adopt and try to implement new practices like ‘stress testing’ and ‘concentration management’. Today, US community bankers are trying to adopt these new practices with mixed results.