Policy Statement on the Principles for Development and Distribution of Annual Stress Test Scenarios

SUMMARY: This final guidance sets forth the general processes and factors to be used by the OCC in developing and distributing the stress test scenarios for the annual stress test required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act") as implemented by the Annual Stress Test final rule (Stress Test Rule) published on October 9, 2012. Under the Stress Test Rule national banks and federal savings associations with total consolidated assets of more than $10 billion (covered institutions) are required to conduct annual stress tests using a minimum of three scenarios (baseline, adverse and severely adverse) provided by the OCC. The Stress Test Rule specified that the OCC will provide the required scenarios to the covered institutions by November 15th of each year. On November 15, 2012, the OCC published interim guidance explaining how the OCC would develop the stress test scenarios. /1/ The OCC is now adopting the interim guidance as final.

/1/ 77 FR 68047 (November 15, 2012). END FOOTNOTE

DATES: This final guidance is effective November 27, 2013.

FOR FURTHER INFORMATION CONTACT: Robert Scavotto, Deputy Director, International Analysis and Banking Condition (202) 649-5477, Richard Nisenson, Director, Industry and Regional Analysis (202) 649-5457, Henry Barkhausen, Attorney, or Ron Shimabukuro, Senior Counsel, Legislative and Regulatory Activities Division (202) 649-5490, Office of the Comptroller of the Currency, 400 7th St. SW., Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

I. Background

Section 165(i)(2) of the Dodd-Frank Act requires certain financial companies, including national banks and federal savings associations with total consolidated assets of more than $10 billion (covered institutions), to conduct annual stress tests. The OCC published in the Federal Register on October 9, 2012, the final Stress Test Rule /2/ implementing the requirements and setting out definitions and rules for scope of application, scenarios, reporting, and disclosure. Under the Stress Test Rule, covered institutions are required to conduct annual stress tests based on the annual stress test cycle set out in Table 1.

FOOTNOTE 2 77 FR 61238 (October 9, 2012). END FOOTNOTE

.... Table 1--Process Overview of Annual Stress Test Cycles for Covered

.... Institutions

Key step......................................Over..$50...... $10 to..$50

..............................................billion........billion

1. OCC distributes scenarios for annual...... By November 15 By November

stress tests................................................ 15.

2. Covered institutions conduct annual stress By January 5.. By March 31.

test and submit Annual Stress Test Report to

the OCC and the Board

3. Covered institutions make required public..Between March..Between June

disclosures.................................. 15 and March.. 15 and June

..............................................31............ 30.

A key component of the annual stress test is the stress test scenarios. Scenarios are sets of conditions that affect the U.S. economy or the financial condition of covered institutions. Each scenario includes the values of the variables specified for each quarter over the stress test horizon. The variables specified for each scenario generally address economic activity, asset prices, and other measures of financial market conditions for the United States and key foreign countries. The OCC annually will determine scenarios that are appropriate for use for each annual stress test. The timeline in Table 1 provides that the OCC will distribute stress test scenarios to covered institutions by November 15th of each year. This document articulates the principles that the OCC will apply to develop and distribute those scenarios for covered institutions.

II. Summary of Comment Received

The OCC published interim guidance in the Federal Register on November 15, 2012, that explained the principles the OCC will apply to develop stress test scenarios. The interim guidance was effective immediately. The OCC solicited comment on all aspects of the interim guidance and received one comment on the interim guidance. A public interest group believed that stress test scenarios should factor in the possible loss of short-term funding. The OCC agrees with the commenter that short-term funding and liquidity in general are factors that need to be considered. In this regard the OCC notes that the final guidance, while focusing on the capital position of covered institutions, would permit the use of interagency scenarios that include contraction in short-term funding, if appropriate. Additionally, the interagency Supervisory Guidance on Stress Testing for Banking Organizations With More than $10 Billion in Total Consolidated Assets, which applies to all stress testing and not merely stress testing pursuant to the Stress Test Rule, specifically requires that stress tests take into account liquidity. ("[U]ses of a banking organization's stress testing framework should include . . . assessing liquidity adequacy and informing contingency funding plans.") /3/ Finally, the OCC is working with the Federal Reserve Board and the Federal Deposit Insurance Corporation on rules to implement the Basel III liquidity provisions. /4/

FOOTNOTE 3 77 FR 29458, 29465 (May 17, 2012). END FOOTNOTE

FOOTNOTE 4 Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action, 77 FR 52792, 52796, n.11 (Aug. 30, 2012). END FOOTNOTE

The commenter also believed that stress testing models should be made publicly available so that they can be subject to "open source" critique. The commenter believed that "[t]here are no requirements that the federal regulators or the covered banks discuss the specification, statistical fit, or out-of-sample forecasting properties of the risk models they are using." The commenter requests disclosure of both supervisory models and the stress testing models used by covered institutions. The first part of the request is not applicable to the OCC because the OCC is not required by the Dodd-Frank Act to run supervisory models. The second part of the request would require an amendment to the Stress Test Rule and is outside the scope of this guidance, which addresses the process for developing the baseline, adverse, and severely adverse stress test scenarios. While the scenarios are key inputs for the company-run and supervisory stress test models, the scenarios are different from the models themselves. The OCC does, as part of the supervisory process, however, expect covered institutions to have a stress testing framework that incorporates validation or other type of independent review aimed at ensuring the integrity of stress testing processes and results. /5/ If a banking organization engages a third-party vendor to support some or all of its stress testing activities, there should be appropriate controls in place to ensure that those externally developed systems and processes are sound, applied correctly, and appropriate for the banking organization's risks, activities, and exposures. /6/

FOOTNOTE 5 For validation of models and other quantitative tools used for stress testing, see OCC Bulletin 2011-12, "Supervisory Guidance on Model Risk Management," April 4, 2011, available at http://www.occ.gov/news-issuances/bulletins/2011/bulletin-2011-12a.pdf. END FOOTNOTE

FOOTNOTE 6 77 FR 29458, 29471 (May 17, 2012). END FOOTNOTE

III. Paperwork Reduction Act

In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3506; 5 CFR Part 1320, Appendix A1), the OCC reviewed the final guidance. The OCC may not conduct or sponsor, and an organization is not required to respond to, an information collection unless the information collection displays a currently valid Office of Management and Budget (OMB) control number. The final guidance contains no new collections of information under the PRA beyond those contained in OMB Control No. 1557-0311, the collection covering the Stress Test Rule.

IV. Principles for Development and Distribution of Annual Stress Test Scenarios

The text of the guidance is as follows.

Principles for Development and Distribution of Annual Stress Test Scenarios

I. Introduction

Section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires certain financial companies, including national banks and federal savings associations with total consolidated assets of more than $10 billion (covered institutions), to conduct annual stress tests. The Office of the Comptroller of the Currency (OCC) published in the Federal Register on October 9, 2012, a final rule (Stress Test Rule) implementing the requirements and setting out definitions and rules for scope of application, scenarios, reporting, and disclosure. /1/ Under the Stress Test Rule, each year the OCC will distribute stress test scenarios to covered institutions. This document articulates the principles that the OCC will apply to develop and distribute those scenarios for covered institutions.

FOOTNOTE 1 Annual Stress Test, 77 FR 61238 (October 9, 2012). END FOOTNOTE

II. Stress Tests

As defined by the Stress Test Rule, a stress test is "a process to assess the potential impact of stressful scenarios on the consolidated earnings, losses, and capital of a covered institution over the planning horizon, taking into account the covered institution's current condition, risks, exposures, strategies, and activities." /2/

FOOTNOTE 2 12 CFR 46.2 (Definition of Stress Test). END FOOTNOTE

--This is a summary of a Federal Register article originally published on the page number listed below--

Final guidance.

CFR Part: "12 CFR Part 46"

Citation: "78 FR 64153"

Document Number: "Docket No. OCC-2012-0016"

Federal Register Page Number: "64153"

"Rules and Regulations"