Supervisory Guidance on Implementing Dodd-Frank Act Company-Run Stress Tests for Banking Organizations With Total Consolidated Assets of More Than…

Supervisory Guidance on Implementing Dodd-Frank Act Company-Run Stress Tests for Banking Organizations With Total Consolidated Assets of More Than $10 Billion but Less Than $50 Billion

SUMMARY: The Board, FDIC, and OCC, (collectively, the agencies) are issuing this guidance, which outlines principles for implementation of the stress tests required under section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or DFA stress tests), applicable to all bank and savings and loan holding companies, national banks, state member banks, state nonmember banks, Federal savings associations, and state-chartered savings associations with more than $10 billion but less than $50 billion in total consolidated assets (collectively, the $10-50 billion companies). The guidance discusses supervisory expectations for DFA stress test practices and offers additional details about methodologies that should be employed by these companies.

EFFECTIVE DATE: Effective dates are as follows:

For the Board: April 1, 2014.

For the FDIC: March 31, 2014.

For the OCC: March 31, 2014.

FOR FURTHER INFORMATION CONTACT:

Board: David Palmer, Senior Supervisory Financial Analyst, (202) 452-2904; Joseph Cox, Financial Analyst, (202) 452-3216; Keith Coughlin, Manager, (202) 452-2056; Benjamin McDonough, Senior Counsel, (202) 452-2036; or Christine Graham, Senior Attorney, (202) 452-3005, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551.

FDIC: Ryan Sheller, Section Chief, (202) 412-4861; Alisha Riemenschneider, Senior Financial Institutions Specialist, (712) 212-3280; Mark Flanigan, Counsel, (202) 898-7427; or Jason Fincke, Senior Attorney, (202) 898-3659, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.

OCC: Kari Falkenborg, Financial Analyst, (202) 649-6831; Harry Glenos, Senior Financial Advisor, (202) 649-6409; Ron Shimabukuro, Senior Counsel, or Henry Barkhausen, Attorney, Legislative and Regulatory Affairs Division, (202) 649-5490, Office of the Comptroller of the Currency, 400 7th Street SW., Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

I. Background

In October 2012, the agencies issued final rules implementing stress testing requirements for companies /1/ with over $10 billion in total assets pursuant to section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA stress test rules). /2/ At that time, the agencies also indicated that they intended to publish supervisory guidance to accompany the final rules and assist companies in meeting rule requirements, including separate guidance for companies with between $10 billion and $50 billion in total assets. To supplement these rules, on July 30, 2013, the agencies sought public comment on proposed supervisory guidance ("proposed guidance") that discussed supervisory expectations regarding the conduct of the DFA stress tests and offered additional details about methodologies that should be employed by these companies. /3/

FOOTNOTE 1 For the OCC, the term "company" is used in this guidance to refer to national banks and Federal savings associations that qualify as "covered institutions" under the OCC Annual Stress Test Rule. 12 CFR 46.2. For the Board, the term "company" is used in this guidance to refer to state member banks, bank holding companies, and savings and loan holding companies. See 12 CFR 252.13. For the FDIC, the term "company" is used in this guidance to refer to insured state nonmember banks and insured state savings associations that qualify as a "covered bank" under the FDIC Annual Stress Test Rule. 12 CFR 325.202. END FOOTNOTE

FOOTNOTE 2 See 77 FR 61238 (October 9, 2012) (OCC final rule), 77 FR 62378 (October 12, 2012) (Board final rule), and 77 FR 62417 (October 15, 2012) (FDIC final rule). END FOOTNOTE

FOOTNOTE 3 See 78 FR 47217 (August 5, 2013). END FOOTNOTE

The proposed guidance was organized around the DFA stress test rule requirements. In the proposed guidance, the agencies indicated that they would expect $10-50 billion companies to follow the DFA stress test rule requirements, other relevant supervisory guidance, and the expectations from the proposed guidance when conducting DFA stress tests. The final guidance is organized in a similar manner.

Consistent with the proposal, other relevant guidance includes "Supervisory Guidance on Stress Testing for Banking Organizations With More Than $10 Billion in Total Consolidated Assets" issued by the agencies in May 2012 ("May 2012 guidance"). /4/ The May 2012 guidance sets forth broad principles for a satisfactory stress testing framework for banking organizations with total assets of more than $10 billion, including principles related to governance, controls, and use of results.

FOOTNOTE 4 Federal Register 29458 (May 17, 2012). END FOOTNOTE

However, it is important to note that other guidance relevant for the $10-50 billion companies does not include, and these firms are not subject to, other requirements and expectations applicable to bank holding companies with assets of at least $50 billion, including the Federal Reserve's capital plan rule, annual Comprehensive Capital Analysis and Review, supervisory stress tests for capital adequacy, or the related data collections supporting the supervisory stress test. /5/

FOOTNOTE 5 See 12 CFR 225.8 (capital plan rule); Supervisory and Company-Run Stress Test Requirements for Covered Companies, 12 CFR part 252, subparts E and F; and the Capital Assessment and Stress Testing information collection (FR Y-14Q, FR Y-14M, and FR Y-14A). END FOOTNOTE

II. Summary of Comments

The agencies received 13 comments on the guidance from trade organizations, industry participants, vendors, and individuals. In addition to the comments, the agencies held a series of discussions with trade groups, state banking supervisors, and the banking organizations to raise awareness about the proposed guidance and solicit feedback. Some commenters expressed support for the proposed guidance. However, several commenters recommended changes to, or clarification of, certain provisions of the proposed guidance, as discussed below. In response to these comments, the agencies have clarified the principles set forth in the guidance and modified the proposed guidance in certain respects as described in this section of the SUPPLEMENTARY INFORMATION.

A. Overall Comments on the Proposed Guidance

Commenters provided several suggestions for clarifying or modifying the proposed guidance. Commenters requested additional clarity around what practices are commensurate with a company's size and complexity and what constitutes a larger or more sophisticated company. Some commenters requested that the agencies provide additional tailoring of expectations based on the size and complexity of companies, and on each company's familiarity with stress testing. Other commenters argued that the guidance adopted an approach that was too prescriptive and should provide each company with flexibility to focus its stress test on the company's assessment of its idiosyncratic risks. Commenters also recommended that the agencies consider requiring other types of stress testing besides scenario analysis and that a more comprehensive set of risks should be addressed in the guidance.

The final guidance retains the overall structure and content of the proposal. In addition, the final guidance provides additional detail about certain key requirements already established in the DFA stress testing rules. The proposed guidance emphasized that the expectations regarding stress testing for $10-50 billion companies would generally be reduced compared to expectations for companies with $50 billion or more in assets. In order to underscore that point, the final guidance provides additional examples of certain tailored expectations for $10-50 billion companies. In addition, the final guidance provides information on the circumstances under which a $10-50 billion company should use the more advanced practices described in the guidance.

Several commenters opposed stress testing for $10-50 billion companies. The commenters argued that conducting the stress tests would be expensive, time-consuming, and of limited benefit. One commenter suggested that the stress tests would distract key personnel from conducting other types of risk management. Commenters requested that $10-50 billion companies be exempt from stress testing requirements under certain circumstances, such as if the company was well capitalized, or be allowed to use an alternative simplified stress test, such as assuming certain loss rates or conducting a local market and concentration analysis.

Stress testing for companies with more than $10 billion but less than $50 billion in total consolidated assets is a requirement of the Dodd-Frank Act. The agencies are not exempting a company based on its pre-stress capital ratios or allowing companies to conduct a simplified stress test that is not based on the supervisory scenarios provided by each agency, as those practices may not address the possibility of losses under stressful circumstances. However, as noted above, the agencies have sought to tailor the stress testing requirements and expectations for $10-50 billion companies. For example, the expectations for data sources, data segmentation, sophistication of estimation practices approaches, reporting and public disclosure are elevated for larger and more complex organizations than for $10-50 billion companies.

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

Final supervisory guidance.

CFR Part: "12 CFR Part 46"

Citation: "79 FR 14153"

Document Number: "Docket No. OCC-2013-0013"

Federal Register Page Number: "14153"

"Rules and Regulations"