Mar 17 2016
The Usefulness of Effective Credit Union Stress Testing
Credit unions should look beyond stress testing as merely a regulatory requirement. Strategic risks exist for financial institutions at every level and it is critical to have the appropriate safeguards in place.
P. Braginetz Associates
Report Number 396
In the broadest sense, stress testing is a tool to quantify the impacts that severe but plausible shocks could have on the integrity of a structure or system. Stress testing has a variety of practical applications. To a doctor, it can involve having a patient walk or run on a treadmill, hooked up to an electrocardiogram machine to monitor the performance of his or her heart and blood pressure while experiencing increasingly intense levels of exertion. An automotive engineer will deliberately crash a driverless car into a wall to measure the ability of the vehicle to protect its occupants at various speeds. And to a credit union, the primary objective of stress testing is for the board and management to assess the adequacy of the institution’s capital to absorb significant and out-of-the- ordinary, but plausible, economic stresses.
The author acknowledges the generosity of the executives of the four credit unions that participated in this survey, who provided extensive confidential internal documentation, including risk analytics, policies, and reports. Filene also thanks its generous sponsors for making this important research possible.