[Federal Register Volume 78, Number 232 (Tuesday, December 3, 2013)]
[Rules and Regulations]
[Pages 72534-72537]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-28608]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
Policy Statement on the Principles for Development and
Distribution of Annual Stress Test Scenarios
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Final guidance.
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SUMMARY: Section 165(i) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (``Section 165(i)'') requires the
Federal Deposit Insurance Corporation (the ``FDIC'' or ``Corporation'')
to issue regulations that mandate FDIC-insured state nonmember banks
and FDIC-insured state-chartered savings associations with total
consolidated assets of more than $10 billion (``covered banks'') to
conduct annual stress tests, report the results of such stress tests to
the Corporation and the Board of Governors of the Federal Reserve
System (``Board of Governors''), and publish a summary of the results
of the stress tests. On October 15, 2012, the FDIC published in the
Federal Register a final rule implementing the requirements of Section
165(i) (the ``Stress Test Rule''). Under the Stress Test Rule covered
banks are required to conduct annual stress tests using a minimum of
three stress test scenarios (baseline, adverse, and severely adverse)
provided by the FDIC. On November 20, 2012, the FDIC published in the
Federal Register interim guidance setting forth the general processes
and factors to be used by the FDIC in developing and distributing the
stress test scenarios. The FDIC is now adopting the interim guidance as
final without change, except for two technical corrections.
DATES: Effective Date: The final guidance is effective January 2,
2014.
FOR FURTHER INFORMATION CONTACT: Ryan Sheller, Senior Large Financial
Institutions Specialist, (202) 412-4861, Division of Risk Management
and Supervision; Rachel Jones, Attorney, (202) 898-6858, or Grace Pyun,
Attorney, (202) 898-3609, Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
The Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 was enacted on July 21, 2010 (the ``Dodd-Frank Act'').\1\ Section
165(i) of the Dodd-Frank Act requires the FDIC, as a Federal primary
financial regulatory agency, to issue regulations that mandate covered
banks to conduct annual stress tests. On October 15, 2012, the FDIC
issued the Stress Test Rule, which implemented the requirements of
Section 165(i) and set out definitions and rules for scope of
application, scenarios, reporting, and disclosure.\2\ Under the Stress
Test Rule, covered banks are required to conduct annual stress tests
based on the annual stress test cycle set out in Table 1.
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\1\ Public Law 111-203, 124 Stat. 1376 (2010).
\2\ 77 FR 62417 (Oct. 15, 2012).
\3\ A covered bank that is a subsidiary of a bank holding
company or a savings and loan holding company may elect to report
and issue its required public disclosure on its parent bank holding
company's or savings and loan holding company's timeline.
Process Overview of Annual Stress Test
[Using data as of September 30th]
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Timeframe for $10
Timeframe for over billion to $50
Step $50 billion covered billion covered
banks banks
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1. FDIC provides covered banks No later than No later than
with scenarios for annual November 15th. November 15th.
stress tests.
2. Covered banks submit No later than No later than
required regulatory reports to January 5th. March 31st.\3\
the FDIC on their stress tests.
3. Covered banks make required Between March 15th Between June 15th
public disclosures. and March 31st. and June 30th.
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[[Page 72535]]
A key component of the annual stress test is the development of the
stress test scenarios that are provided to covered banks on or before
November 15th of each year by the FDIC. Scenarios are those sets of
conditions that affect the U.S. economy or the financial condition of a
covered bank that the FDIC annually determines are appropriate for use
in the stress tests, including, but not limited to, baseline, adverse,
and severely adverse scenarios. 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 FDIC
annually will determine scenarios that are appropriate for use for each
annual stress test. The timeline in Table 1 provides that the FDIC will
distribute stress test scenarios to covered banks no later than
November 15th of each year.
II. Summary of the Interim Guidance and Comments Received
A. Summary of the Interim Guidance
The FDIC published interim guidance in the Federal Register on
November 20, 2012, that articulated the principles the FDIC will apply
to develop and distribute the stress test scenarios for covered banks
as required by the Stress Test Rule.\4\ The interim guidance was
effective immediately and, to the extent practicable, to the 2012
annual stress test cycle. The FDIC also solicited comment on all
aspects of the interim guidance for purposes of finalizing the guidance
and the development and distribution of future stress test scenarios.
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\4\ 77 FR 69553 (Nov. 20, 2012).
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B. Summary of Comments Received
The FDIC received two comments on the interim guidance. One comment
from an individual was not in favor of the Stress Test Rule and
recommended that the FDIC reconsider finalizing the interim guidance.
The FDIC believes the interim guidance gives covered banks and the
market the general processes and factors used for scenario development.
Furthermore, annual stress tests are necessary because they allow
covered banks and the FDIC to determine whether those banks have
capital sufficient to absorb losses that could result from adverse
economic conditions. The FDIC views stress test results as an important
source of forward-looking information that can help identify downside
risks and assess the potential impact of adverse outcomes on capital
adequacy. Accordingly, the FDIC has decided to finalize this interim
guidance.
The other comment from a public interest group supported the
interim guidance and further recommended that the FDIC include mark-to-
market losses and short-term funding losses in stress test scenarios.
To that end, the commenter recommended expanding the scenarios to state
that if mark-to-market losses occur in assets that are funded using
short-term borrowing (such as asset back commercial paper or repurchase
agreements), the covered bank must explain what steps (for example
additional borrowing or asset sales) it would undergo to replace a
specified percentage of that funding. The FDIC agrees that covered
banks should consider the subsequent liquidity effects stemming from
the impact of the stress test scenarios; however, this scenario
guidance is developed for covered banks under the Stress Test Rule. The
Stress Test Rule focuses on how well covered banks' capital levels
withstand hypothetical economic scenarios so that covered banks'
management can consider the results for conducting capital planning,
assessing capital adequacy, and evaluating risk management practices.
The Stress Test Rule does not specifically require covered
organizations to detail how they would replace short-term funding
losses. Liquidity stress testing is outside the scope of this guidance,
however, additional guidance regarding such liquidity stress testing
may be considered in the future.
The commenter also recommended that the FDIC disclose additional
information about the methods and data used in the stress tests. The
commenter requested that the FDIC disclose the specification,
statistical fit, or other out-of-sample forecasting properties of the
risk models that are used for developing the stress test scenarios. The
FDIC views this guidance as providing useful information to covered
banks as to how the FDIC develops the economic scenarios including the
methods and data used for stress testing while maintaining the
flexibility to establish the underlying methods and data properties of
risk models for evolving conditions that affect the U.S. economy or the
financial condition of a covered bank. Accordingly, the Corporation
does not believe that providing detailed scenario specifications would
contribute to the broader goal of informing covered banks on the
development of economic scenarios.
After reviewing and carefully considering the comments received on
the interim guidance, the FDIC is finalizing the guidance without
change, except for two technical corrections.
III. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (``PRA'') of 1995
(44 U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the FDIC has reviewed
this final guidance. The FDIC 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 OMB
control number. The FDIC has conducted a PRA analysis on all related
reporting, recordkeeping and disclosure requirements in the Stress Test
Rule and submitted them to OMB for review and approval. The request,
which has been assigned OMB Control No. 3064-0187, has been approved.
No new collection of information pursuant to the PRA is contained in
this final guidance. Additionally, the FDIC did not receive any comment
on the PRA analysis contained in the interim guidance.
IV. Principles for Development and Distribution of Annual Stress Test
Scenarios
The text of the final guidance is as follows.
Principles for Development and Distribution of 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
FDIC-insured state nonmember banks and FDIC-insured state-chartered
savings associations with total consolidated assets of more than $10
billion (``covered banks''), to conduct annual stress tests. The
Federal Deposit Insurance Corporation (``FDIC'' or ``Corporation'')
published in the Federal Register on October 15, 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 FDIC will
distribute stress test scenarios to covered banks. This document
articulates the principles that the FDIC will apply to develop and
distribute those scenarios for covered banks.
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\1\ 77 FR 62417 (Oct. 15, 2012).
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II. Stress Tests
As defined by the Stress Test Rule, a stress test means ``the
process to assess
[[Page 72536]]
the potential impact of scenarios on the consolidated earnings, losses,
and capital of a covered bank over the planning horizon, taking into
account the current condition of the covered bank and the covered
bank's risks, exposures, strategies, and activities.'' \2\ Stress tests
help covered banks and the FDIC determine whether those banks have
capital sufficient to absorb losses that could result from adverse
economic conditions. The FDIC views stress test results as one source
of forward-looking information that can help identify downside risks
and assess the potential impact of adverse outcomes on capital
adequacy. Stress tests are not the only tool the FDIC uses for these
purposes; a complete assessment of a covered bank's capital position
typically includes review of its capital planning processes, the
governance concerning those processes, and the adequacy of capital
under established regulatory capital measures. The FDIC expects the
board of directors and senior management of each covered bank to
consider the results of the annual stress test when conducting capital
planning, assessing capital adequacy, and evaluating risk management
practices.\3\ The FDIC also may use stress test results to determine
whether additional analytical techniques and exercises are appropriate
for a covered bank to employ in identifying, measuring, and monitoring
risks to the financial soundness of the covered bank.
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\2\ 12 CFR 325.202(l).
\3\ Id. at 325.205(b)(3).
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Under the Stress Test Rule, each covered bank is required to
conduct an annual stress test using its financial data as of September
30th of each year, unless the FDIC requires a different ``as of'' date
for any or all categories of financial data.\4\ The stress test must
assess the potential impact of specific scenarios on the regulatory
capital of the covered bank and on certain related items over a
forward-looking planning horizon, taking into account all relevant
exposures and activities.\5\ Under the Stress Test Rule, the planning
horizon is at least nine quarters, consisting of the fourth quarter of
the current calendar year plus all four quarters of each of the two
subsequent calendar years.
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\4\ Id. at 325.201(c)(2) and 325.203(a).
\5\ Id. at 325.205(a).
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III. Scenarios
Scenarios are those sets of conditions that affect the U.S. economy
or the financial condition of a covered bank that the Corporation
annually determines are appropriate for use in the stress tests,
including, but not limited to, baseline, adverse, and severely adverse
scenarios.\6\ The FDIC annually will determine scenarios that are
appropriate for use under the Stress Test Rule. In conducting the
stress test under the Stress Test Rule, each covered bank must use the
scenarios provided by the FDIC.
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\6\ Id. at 325.202(i).
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Each scenario includes the values of the variables specified for
each quarter over the stress test horizon. The FDIC expects that
covered banks may not need to use all of the variables provided and may
need to estimate relationships to identify other variables, such as
those reflecting local economic conditions, from the values the FDIC
provides. The FDIC will review the appropriateness of estimation
processes and resulting estimates, or other modifications of variables,
through its ongoing supervisory processes.
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. Variables
that describe economic activity likely include, but are not limited to,
the growth rate of gross domestic product, the unemployment rate, and
the inflation rate. The FDIC anticipates that the path of the
unemployment rate in particular will be a key variable indicating the
severity of economic stress, as this variable provides a simple and
widely noted gauge of the state of the U.S. economy. This point is
discussed further in this statement in connection with severely adverse
scenarios.
Other variables may represent asset prices and financial market
conditions, including interest rates. The FDIC expects to specify
scenarios using a standard core set of variables, although variables
may be added or deleted as the U.S. and global economic environment
evolves. The FDIC will attempt to minimize additions, redefinitions, or
re-specifications of the stress test variables from year to year, as
the use of such new or different variables may potentially require
covered banks to modify their testing systems.
The scenarios provided by the FDIC reflect at least three sets of
economic and financial conditions, described in the rule as baseline,
adverse, and severely adverse. The baseline broadly corresponds to the
set of conditions expected to prevail over the term of the stress
tests. The adverse and severely adverse scenarios introduce
hypothetical stress conditions intended to test the safety and
soundness of covered banks as well as their capital planning processes.
The aim is to assess the covered banks' ability to identify and measure
the risks they face under adverse conditions, and to ensure that
appropriate amounts of capital exist to support those risks. The FDIC
will evaluate both the adequacy of the projections and the processes
used in the stress test. The FDIC expects covered banks to be able to
maintain ready access to funding, continue operations, meet obligations
to creditors and counterparties, and continue to serve as credit
intermediaries under conditions that are significantly more adverse
than expected.
The baseline scenario means a set of conditions that affect the
U.S. economy or the financial condition of a covered bank, and that
reflect the consensus views of the economic and financial outlook.\7\
These views are based on information obtained from government agencies,
other public sector organizations, and private sector forecasters as
close to the date of the annual stress test as possible. The baseline
may be based on one or more of the ``consensus'' forecasts produced by
various organizations, although the FDIC may choose to depart from the
consensus if necessary to provide a more appropriate baseline for the
stress tests.
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\7\ Id. at 325.202(c).
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The adverse scenario means a set of conditions that affect the U.S.
economy or the financial condition of a covered bank that are more
adverse than those associated with the baseline scenario and may
include trading or other additional components.\8\ The adverse scenario
may also be used to investigate other risks, such as including
operational risks that the FDIC believes should be better understood or
more closely monitored.
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\8\ Id. at 325.202(a).
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The severely adverse scenario means a set of conditions that affect
the U.S. economy or the financial condition of a covered bank and that
overall are more severe than those associated with the adverse scenario
and may include trading or other additional components.\9\ Three
examples of severe recessions from recent U.S. experience may
illustrate the anticipated depth of the severely adverse scenario as it
relates to the unemployment rate:
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\9\ Id. at 325.202(j).
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The 1973-75 recession, during which the unemployment rate
increased 4.1 percentage points, from 4.9 percent in third quarter 1973
to 9.0 percent in second quarter 1975 (one quarter after the recession
ended).
[[Page 72537]]
The back-to-back recessions in 1980 and 1981-82, during
which the unemployment rate increased 4.7 percentage points, from 6.1
percent in fourth quarter 1979 to 10.8 percent in fourth quarter 1982
(the last quarter of the recession).
The 2007-09 recession, during which the unemployment rate
increased 5.3 percentage points, from 4.7 percent in third quarter 2007
to 10.0 percent in fourth quarter 2009 (two quarters after the
recession ended).
Other variables under the adverse and severely adverse scenarios
would be expected to follow paths consistent with the depth and
duration of previous recessions and with models of macroeconomic
activity. The severely adverse scenario also may reflect other risks
that are especially salient and that might not be captured by past
recessions, including elevated levels of systemic risk.
The scenarios distributed by the FDIC for the stress tests will
cover at least nine quarters. In addition, the FDIC will generally
publish scenarios that cover one year beyond the planning horizon of
the stress test, to allow for the estimation of loan losses for the
year following the stress planning horizon; this additional
specification allows covered banks to determine adequate levels of loan
loss reserves.
The FDIC believes that as a general matter all covered banks should
use the same set of scenarios and planning horizon so that the FDIC can
better compare results across covered banks. To that end, the FDIC
intends to provide one set of scenarios for use by all covered banks.
However, the FDIC believes there may be circumstances that would
warrant the use of different or additional scenarios or a planning
horizon of more than nine quarters. Thus, under the Stress Test Rule,
the FDIC reserves the authority to require a covered bank to use
different or additional scenarios and/or planning horizons the
Corporation may deem appropriate.\10\ For example, a covered bank may
conduct business activities or have risk exposures that would encounter
stress under conditions that differ materially from those that would
generate stress for other banks. The FDIC expects such situations to be
rare and anticipates making every effort to distribute the same
scenarios to all covered banks.
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\10\ Id. at 325.201(c).
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In addition to the minimum three scenarios, the FDIC may require a
covered bank with significant trading activities to include factors
related to trading and counterparty risk in its stress test. Typically,
these factors might include additional shocks to specific market
prices, interest rates, rate spreads, or other key market variables
consistent with historical or hypothetical adverse market events.
IV. Development and Distribution
As one part of the process of developing scenarios, the FDIC will
gather information from outside entities and develop themes for the
stress test scenarios, including the identification of potentially
material vulnerabilities or salient risks to the financial system, and
consider potential paths for individual variables. The outside entities
may include academic experts, staffs of international organizations,
foreign supervisors, financial institutions that regularly provide
forecasts, and other private sector risk analysts that regularly
conduct stress tests based on U.S. and global economic and financial
scenarios. The FDIC will use the information gathered in this manner to
inform its consideration of potential risks and scenarios.
The Office of the Comptroller of the Currency (``OCC''), the Board
of Governors of the Federal Reserve System (``Board''), and the FDIC
(collectively, the ``Agencies'') expect to consult closely to develop
scenarios for stress testing. Absent specific supervisory concerns, the
FDIC anticipates that the annual stress test scenarios distributed by
the FDIC will be the same as or nearly identical to the scenarios
developed by the Board for the supervisory stress tests conducted by
the Board under Section 165(i)(1). This would mean the same economic
and financial variables following the same paths as used in the
scenarios for the Board's supervisory stress tests.
Although the Agencies generally expect to consult closely on
scenario development, they may have different views of risks that
should be reflected in the stress test scenarios used by covered banks
for the annual stress test. The FDIC may distribute scenarios to
covered banks that differ in certain respects from those distributed by
the OCC and the Board if necessary to better reflect specific FDIC
concerns. The FDIC expects such situations to be extremely rare,
however, and anticipates making every effort to avoid differences in
the scenarios required by each agency.
The FDIC anticipates that the stress test scenarios will be revised
annually as appropriate to ensure that each scenario remains relevant
under prevailing economic and industry conditions. These yearly
revisions will enable the scenarios to capture evolving risks and
vulnerabilities. The need to ensure that scenarios do not become
outdated because of economic and financial developments makes a lengthy
process of review and comment concerning scenarios prior to
distribution each year impractical. However, the process of
consultation with the Board and the OCC, as well as the ongoing
interaction of FDIC staff with public and private sector experts to
obtain views on salient risks and to obtain suggestions for the
behavior of key economic variables, should ensure that the stress
conditions reflected in the scenarios are well suited to their purpose.
The scenario development process culminates with the distribution
of the scenarios to all covered banks no later than November 15th of
each year. The scenario descriptions provided to covered banks will
include values for economic and financial variables depicting the paths
those variables follow under the scenarios. The FDIC believes that
distribution of the scenarios no later than November 15th aligns with
similar processes at the OCC and the Board.
Federal Deposit Insurance Corporation.
Dated at Washington, DC, this 25th day of November, 2013.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2013-28608 Filed 12-2-13; 8:45 am]
BILLING CODE 6714-01-P