Policy Statement on the Scenario Design Framework for Stress Testing

SUMMARY: The Board is adopting a final policy statement on the approach to scenario design for stress testing that will be used in connection with the supervisory and company-run stress tests conducted under the Board's regulations pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or Act) and the Board's capital plan rule.

DATES: This rule will be effective on January 1, 2014.

FOR FURTHER INFORMATION CONTACT: Tim Clark, Senior Associate Director, (202) 452-5264, Lisa Ryu, Deputy Associate Director, (202) 263-4833, David Palmer, Senior Supervisory Financial Analyst, (202) 452-2904, or Joseph Cox, Financial Analyst, (202) 452-3216, Division of Banking Supervision and Regulation; Benjamin W. McDonough, Senior Counsel, (202) 452-2036, or Jeremy Kress, Attorney, (202) 872-7589, Legal Division; or Andreas Lehnert, Deputy Director, (202) 452-3325, or Rochelle Edge, Assistant Director, (202) 452-2339, Office of Financial Stability Policy and Research.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Proposed Policy Statement

III. Summary of Comments

A. Design of Stress Test Scenarios

B. Additional Variables

C. Severely Adverse Scenario Development

D. Adverse Scenario Development

E. Market Shock and Additional Scenarios or Components of Scenarios

F. Transparency and Timing

G. Public Disclosure

IV. Administrative Law Matters

A. Use of Plain Language

B. Paperwork Reduction Act Analysis

C. Regulatory Flexibility Act Analysis

I. Background

Stress testing is a tool that helps both bank supervisors and a financial company measure the sufficiency of capital available to support the financial company's operations throughout periods of stress. /1/ The Board and the other federal banking agencies previously have highlighted the use of stress testing as a means to better understand the range of a financial company's potential risk exposures. /2/

FOOTNOTE 1 A full assessment of a company's capital adequacy must take into account a range of risk factors, including those that are specific to a particular industry or company. END FOOTNOTE

FOOTNOTE 2 See, e.g., Supervisory Guidance on Stress Testing for Banking Organizations With More Than $10 Billion in Total Consolidated Assets, 77 FR 29458 (May 17, 2012), available at http://www.federalreserve.gov/bankinforeg/srletters/sr1207a1.pdf; Supervision and Regulation Letter SR 10-6, Interagency Policy Statement on Funding and Liquidity Risk Management (March 17, 2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1006a1.pdf; Supervision and Regulation Letter SR 10-1, Interagency Advisory on Interest Rate Risk (January 11, 2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/SR1001.pdf; Supervision and Regulation Letter SR 09-4, Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies (revised March 27, 2009), available at http://www.federalreserve.gov/boarddocs/srletters/2009/SR0904.htm; Supervision and Regulation Letter SR 07-1, Interagency Guidance on Concentrations in Commercial Real Estate (Jan. 4, 2007), available at http://www.federalreserve.gov/boarddocs/srletters/2007/SR0701.htm; Supervision and Regulation Letter SR 12-7, Supervisory Guidance on Stress Testing for Banking Organizations with More Than $10 Billion in Total Consolidated Assets (May 14, 2012), available at http://www.federalreserve.gov/bankinforeg/srletters/sr1207.htm; Supervision and Regulation Letter SR 99-18, Assessing Capital Adequacy in Relation to Risk at Large Banking Organizations and Others with Complex Risk Profiles (July 1, 1999), available at http://www.federalreserve.gov/boarddocs/srletters/1999/SR9918.htm; Supervisory Guidance: Supervisory Review Process of Capital Adequacy (Pillar 2) Related to the Implementation of the Basel II Advanced Capital Framework, 73 FR 44620 (July 31, 2008); The Supervisory Capital Assessment Program: SCAP Overview of Results (May 7, 2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf; and Comprehensive Capital Analysis and Review: Objectives and Overview (Mar. 18, 2011), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110318a1.pdf. END FOOTNOTE

In particular, building on its experience during the financial crisis, the Board initiated the annual Comprehensive Capital Analysis and Review (CCAR) in late 2010 to assess the capital adequacy and the internal capital planning processes of the same large, complex bank holding companies that participated in SCAP and to incorporate stress testing as part of the Board's regular supervisory program for assessing capital adequacy and capital planning practices at these large bank holding companies. The CCAR represents a substantial strengthening of previous approaches to assessing capital adequacy and promotes thorough and robust processes at large financial companies for measuring capital needs and for managing and allocating capital resources.

On November 22, 2011, the Board issued an amendment (capital plan rule) to its Regulation Y to require all U.S bank holding companies with total consolidated assets of $50 billion or more to submit annual capital plans to the Board. This procedure allows the Board to assess whether the bank holding companies have robust, forward-looking capital planning processes and have sufficient capital to continue operations throughout times of economic and financial stress. /3/

FOOTNOTE 3 See Capital Plans, 76 FR 74631 (Dec. 1, 2011) (codified at 12 CFR 225.8). END FOOTNOTE

In the wake of the financial crisis, Congress enacted the Dodd-Frank Act, which requires the Board to implement enhanced prudential supervisory standards, including requirements for stress tests, for covered companies to mitigate the threat to financial stability posed by these institutions. /4/ Section 165(i)(1) of the Dodd-Frank Act requires the Board to conduct an annual stress test of each bank holding company with total consolidated assets of $50 billion or more and each nonbank financial company that the Council has designated for supervision by the Board (covered company) to evaluate whether the covered company has sufficient capital, on a total consolidated basis, to absorb losses as a result of adverse economic conditions (supervisory stress tests). /5/ The Act requires that the supervisory stress test provide for at least three different sets of conditions-- baseline, adverse, and severely adverse conditions--under which the Board would conduct its evaluation. The Act also requires the Board to publish a summary of the supervisory stress test results.

FOOTNOTE 4 See section 165(i) of the Dodd-Frank Act; 12 U.S.C. 5365(i). END FOOTNOTE

FOOTNOTE 5 See 12 U.S.C. 5365(i)(1). END FOOTNOTE

In addition, section 165(i)(2) of the Dodd-Frank Act requires the Board to issue regulations that require covered companies to conduct stress tests semi-annually and require financial companies with total consolidated assets of more than $10 billion that are not covered companies and for which the Board is the primary federal financial regulatory agency to conduct stress tests on an annual basis (collectively, company-run stress tests). /6/ The Board issued final rules implementing the stress test requirements of the Act on October 12, 2012 (stress test rules). /7/

FOOTNOTE 6 12 U.S.C. 5365(i)(2). END FOOTNOTE

FOOTNOTE 7 77 FR 62398 (October 12, 2012); 12 CFR part 252, subparts F-H. END FOOTNOTE

The Board's stress test rules provide that the Board will notify covered companies, by no later than November 15 of each year of a set of conditions (each set, a scenario), it will use to conduct its annual supervisory stress tests. /8/ The rules further establish that the Board will provide, also by no later than November 15, covered companies and other financial companies subject to the final rule the scenarios they must use to conduct their annual company-run stress tests. /9/ Under the stress test rules, the Board may require certain companies to use additional components in the adverse or severely adverse scenario or additional scenarios. /10/ For example, the Board has required large banking organizations with significant trading activities to include trading and counterparty components (the "market shock," described in the following sections) in their adverse and severely adverse scenarios. The Board will provide any additional components or scenarios by no later than December 1 of each year. /11/ The Board expects that the scenarios it will require the companies to use will be the same as those the Board will use to conduct its supervisory stress tests (together, stress test scenarios).

FOOTNOTE 8 See id.; 12 CFR 252.134(b). END FOOTNOTE

FOOTNOTE 9 See id.; 12 CFR 252.144(b), 154(b). The annual company-run stress tests use data as of September 30 of each calendar year. END FOOTNOTE

FOOTNOTE 10 12 CFR 252.144(b), 154(b). END FOOTNOTE

FOOTNOTE 11 Id. END FOOTNOTE

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

Final rule; policy statement.

CFR Part: "12 CFR Part 252"

RIN Number: "RIN 7100-AD-86"

Citation: "78 FR 71435"

Document Number: "Regulation YY; Docket No. OP-1452"

Federal Register Page Number: "71435"

"Rules and Regulations"