Capital Stress Testing: A Necessity for All Credit Unions

The Dodd-Frank Act Stress Testing, prescribed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires national banks and federal savings associations with more than $10 billion in assets to conduct annual stress tests. When finance professionals mention capital stress testing, most are referring to DFAST instead of the complementary testing through the Comprehensive Capital Analysis and Review. CCAR is advocated by the Federal Reserve and applicable to bank holding companies with assets greater than $50 billion.

Although not directly impacted by DFAST or CCAR, the NCUA has mandated a similar protocol (e.g., submitting capital plans and performing capital stress tests) for credit unions with $10 billion or more assets, with some differences in deliverables and timing of submission. The purposes of capital planning and stress testing are to assess whether institutions have adequate capital to survive periods of severe economic turmoil. Although the process of developing such initiatives can be costly and burdensome, every institution, regardless of asset size, should perform both.