What is Stress Testing?
The process of evaluating a loan's performance under adverse scenarios such as rising interest rates, declining revenues, increased vacancy, or economic recession.
Stress Testing in commercial lending practice
Stress testing helps lenders understand downside risk and determine whether a borrower can maintain adequate debt service coverage under unfavorable conditions. Standard stress tests include a 100–200 basis point interest rate increase, a 10–20% NOI decline, and combined scenarios. Banks at or near CRE concentration thresholds typically run more aggressive stress scenarios and document the results explicitly in the credit memo.
Related terms
Related concepts in commercial underwriting
DSCR (Debt Service Coverage Ratio)
The ratio of net operating income (or available cash flow) to total annual debt service, including principal and interest payments.
Read definitionConcentration Risk
The risk arising from excessive exposure to a single borrower, industry, geography, or loan type within a lending portfolio.
Read definitionCRE (Commercial Real Estate)
Real property used for business purposes, including office, retail, industrial, multifamily (5+ units), and hospitality properties.
Read definitionMRA (Matter Requiring Attention)
A finding issued by bank examiners during a regulatory examination that identifies a deficiency requiring corrective action.
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How Stress Testing shows up in AI underwriting
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