Community Bank Stress Test: Department of Finance

The stress-test resources presented below are provided as a means for community banks to quickly adopt macro stress testing as part of their risk-management toolkit. These resources are presented by Tim Yeager, Arkansas Bankers Association Chair in Banking, from the Department of Finance at the Sam M. Walton College of Business. The stress-tests were updated March 8, 2024 with banking data for the year 2023.

Downloadable Materials

Get Stress Test Files

"Any U.S. community bank can utilize the freely available resources that I have developed to build a customized macro stress testing model. The purpose of the model is to assess the bank's ability to withstand a severe and prolonged period of high credit losses.

Although U.S. community banks are not specifically required by regulators to run macro stress tests, those with high levels of commercial real estate lending are required to stress-test their portfolios.

In addition, the banking industry has evolved quickly since 2009 to incorporate stress-testing as a routine part of risk management.

The resources presented here allow community banks to quickly adopt macro stress testing as part of their risk-management toolkit. These resources were originally developed as a service to Arkansas community banks, but I have expanded the scope in the hope that they will benefit all U.S. community banks."

- Tim Yeager

Project Details

Two files are available for download in a compressed file called StressTestFiles.zip. They have been updated to run the stress tests on 2024 bank data.

1. "Community Bank Stress Test Manual.pdf" is a PDF file that provides the instructions to generate and customize a community bank stress test specific to your bank.

2. "Generate Your Bank Stress Test.xlsm" is a macro-enabled file that will allow you to generate a stress test specific to your bank beginning with year-end 2024 financial data. You will use this file to generate your initial stress-test model. A macro-enabled file contains Visual Basic code, and it requires your approval to open. Don't worry, the file is safe and will not harm your computer.

Research Articles

An Historical Loss Approach to Community Bank Stress Testing by Timothy J. Yeager and Cao Fang.

A Historical Loss Stress Test: How Will COVID-19 Affect Community Banks by Michael Adkison with research by Tim Yeager and Cao Fang

Supervisory Guidance on Community Bank Stress Testing

These links to various supervisory guidance suggest that community banks use simple stress testing frameworks to assess capital adequacy. My model available for you to download is consistent with this guidance.

The federal banking supervisory agencies issued this Statement to Clarify Supervisory Expectations for Stress Testing by Community Banks in May 2012. The agencies "emphasize that all banking organizations, regardless of size, should have the capacity to analyze the potential impact of adverse outcomes on their financial condition.

OCC BULLETIN 2012-33 "Community Bank Stress Testing" states that "[f]or 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." My stress test contains the core elements described in this supervisory guidance.

The FDIC article by Bill Baxter and Tom Lyons titled "Stress Testing Credit Risk at Community Banks" published in Supervisory Insights - Summer 2012 "describes the credit-related stress-testing process and explains how community bank boards of directors and senior management can use this process to better manage risk."

The federal banking supervisory agencies issued supervisory guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices in December 2006. This guidance emphasizes sound risk management practices for banks with high concentrations in CRE lending. In addition, "[a]n institution with CRE concentrations should perform portfolio-level stress tests or sensitivity analysis to quantify the impact of changing economic conditions on asset quality, earnings, and capital.