How many scenarios should be performed? How should scenarios be documented?
The stress testing process should consider a range of scenarios to provide management and the board with a good understanding of the risk profile of the institution. At least one of the scenarios should be a severe stress, one that is unexpected, but plausible. It is important that each scenario is well-documented with a description of the scenario, including key assumptions, related financial statements and supporting schedules. Each scenario should be internally consistent and defensible. That is, all the assumptions and the results must make sense when considered together. There should not be contradictory assumptions built into the scenario. For example, if it is assumed that corn prices are very low, one would not expect to see an assumption of high feed costs in the same scenario. Also, farmland prices are not likely to be rising sharply while grain prices are low and interest rates are high.
