Shock Test
What does it mean
A Shock Test involves simulating worst-case financial scenarios for borrowers to gauge how these could affect their loan repayment ability.
Why does it matter
When you are deciding to give a borrower a loan, you are looking at what their financials look like today, and you are using that information to make a loan decision that may go 3, 5 or 20 years into the future. A valuable tool to help in this underwriting is the Shock Test. What a shock test aims to accomplish is to show what would happen to the business’s ability to repay their loan if certain scenarios were to occur. These scenarios vary by industry and loan type, but some common ones would include:
- Rise in interest rates by 3%
- Decrease in gross profit margin by 10%
- Increase in operating expenses by 10%
- Lose largest customer
By running these scenarios, you will see how sensitive a borrower’s ability to repay their loan would be.
Other Relevant Terms
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Greetings! I'm Clay Sharkey, and there is nothing I like more than assisting others in achieving their goals. I firmly believe that by enhancing a banker's understanding of their customer's' business, they can provide superior service. This superior service, in turn, leads to stronger relationships for the bank, improved performance for the businesses, and better experiences for our communities. Win-win-win.
