Results of Trepp Bank Stress Tests: 1 in 8 US Banks Tested at Risk

When Trepp, LLC released its first Capital Adequacy Stress Test Report of U.S. banks on Wednesday, October 10th, one of the key findings was that commercial real estate exposure was a significant factor in a bank's failure of the test. CRE losses comprised nearly 40% of loan losses for banks that failed the test. "Commercial and industrial lending represented a secondary source of distress, with 24% of forecasted losses for the banks that failed the test," according to the Trepp report.

Trepp used its own model to evaluate the effects of various kinds of stress on the balance sheets and income statements of more than 6,000 banks. "This initial round of tests resulted in one in eight banks receiving a 'failing grade,'" according to the Trepp report. The company's model is adapted from the framework used by the US Federal Reserve Bank's Comprehensive Capital Analysis Review (CCAR) Stress Testing of the 19 largest banking institutions in March 2012.

Trepp's Capital Adequacy Stress Test (T-CAST) combined individual bank data with severely adverse inputs to create hypothetical scenarios for earnings, capital and asset performance for a nine-quarter projection period.