by Samantha Stark
Sometimes, doctors have patients jog on a treadmill to see if their hearts can withstand stress. Regulators do the same with banks, colleges, universities and other organizations — just without the treadmill. Financial stress tests run lenders through simulated “workouts” to separate institutions that are resilient during economic strain from those that aren’t.
These days, most higher education institutions are stretched to their monetary limits. MSUM, alongside 18 of 31 other MnSCU institutions, failed this year’s financial stress test — an analysis of how well the institutions could handle difficult budgetary happenings. MnSCU’s board policy indicates each college and university, along with the system office itself, has its budget monitored on a periodic basis to ensure financial stability throughout each fiscal year.
Within MnSCU institutions, chief financial officers identify potential vulnerabilities that could affect a given system financially. The tests estimate and evaluate the impact of those shocks. Officers weigh factors like institutional debt, revenue and ability to borrow to calculate a composite financial index score which, if below 1, indicates financial weakness.
“The sad thing is that often, organizations have little control over their revenue — only their costs,” said Thomas Fauchald, co-chair of the Inter Faculty Organization state government relations committee. “In the case of higher education revenue, be it tuition or appropriation, there is little a school can do in the short run, and often, there is extreme competitive pressure to get new students.”
Financial stress tests aren’t limited to higher education. They’re done globally, testing everything from nations’ economic standings to individual people’s finances. The Federal Reserve System defines a financial stress test as an analysis presenting three scenarios — a peak unemployment rate of 13 percent, a 50 percent drop in equity prices and a 21 percent decline in housing prices.
In May 2009, the FRS publicly announced the results of a nationwide financial stress test for the first time ever. That one had been organized to help the country recover from its worst economic collapse since the Great Depression. The analysis identified a capital shortfall of $75 billion.
In 2012, the Dodd-Frank Wall Street Reform and Consumer Protection Act was developed to “promote the financial stability of the United States by improving accountability and transparency in the financial system.” Dodd-Frank introduced the requirement that American banks undergo regular financial stress tests to make their financial health conspicuous to the public.
“Transparency is important,” Fauchald said. “I think to keep it a secret would do more harm in the long run than making it public.”
While MnSCU didn’t fare well on the treadmill this checkup, campus admissions initiatives are working to get the system in better shape for next time around.