Report: One-in-eight banks at risk of falling short of capital adequacy requirements

Risk management teams have a responsibility to assess their institutions’ exposure to capital risk, and a risk management framework that offers intuitive tools to assess financial threats offers these professionals with the insight needed to make such evaluations. At least one report says a significant portion of U.S. banks may fall short of capital adequacy requirements in the near future, putting these institutions at severe risk.

Trepp conducted a stress test of capital adequacy for more than 6,000 banks nationwide, making use of a “what-if” strategy in an effort to determine how many financial institutions satisfy regulatory benchmarks for stress threshold. According to its results, 12.7 percent of U.S. banks – 784 in all – failed this testing, with many of these institutions having less than $10 million in assets and being located in specific geographic locations.

“A significant number of banks are at risk of falling short of capital adequacy requirements unless they take some type of corrective action,” said analyst Matt Anderson.

Banks in Georgia, Florida, Illinois and Minnesota were particularly at risk, which itself is not a surprise. The first three states were hit hard by the recent financial downturn – Florida and Illinois have the highest foreclosure rates by state nationwide, according to foreclosure tracker RealtyTrac. Georgia has also been high on that list for the past two years, and Minnesota saw a 42 percent annual increase in foreclosure starts last month.

Such data supports the needs for banks in key areas – including the aforementioned states – to put a risk management software in place that can evaluate portfolio stability and empower executives to make smarter decisions about originations and risk mitigation.

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