FDIC Invites Comments on Stress Test Rules

The Federal Deposit Insurance
Corporation (FDIC) has issued a notice of proposed rulemaking (NPR) for
comment.  The NPR would require the
larger of the banks it regulates to conduct annual capital-adequacy stress
tests.  The tests are one requirement of
the Dodd-Frank Wall Street Reform Act and will affect FDIC-insured banks and
savings institutions with assets of more than $10 billion.  The FDIC currently has 23 financial
institutions meeting that criterion

The proposed rule focuses on capital
adequacy and defines a stress test as a process to assess the potential impact
on the bank of economic and financial conditions (“scenarios”) on the
consolidated earnings, losses, and capital of the covered bank over a set
planning horizon.  FDIC said that these
stress tests would be one component of the broader stress testing activities
conducted by the banks which should address the impact of a broad range of
potentially negative outcomes across a broad set of risk types with impacts
beyond capital adequacy along.  These,
however, are beyond the scope of the proposed rule.

Under the NPR each covered bank
would be required to conduct the test annually using the bank’s financial data
as of September 30 of that year.  Where
the parent company structure of the covered bank includes one or more financial
companies, each with assets greater than the $10 billion threshold, the stress
test requirement applies to the parent and to each subsidiary meeting the threshold,
however the FDIC will coordinate with other regulatory agencies to minimize
complexity or duplication of effort.

As proposed, FDIC would provide each
covered bank with a minimum of three sets of scenarios representing baseline,
adverse, and severely adverse economic and financial conditions and each bank would
use these scenarios to calculate the impact on its potential losses,
pre-provision revenues, loan loss reserves and pro forma capital positions for each quarter end within the
planning horizon.

The NPR also describes the content
of the reports institutions are required to publish, and the timeline for
conducting the stress tests and producing the required reports.

FDIC Acting Chairman Martin J.
Gruenberg said, “Both the FDIC and the institutions being tested will
benefit from the forward-looking results that the stress tests will provide.
The results will assist in ensuring an institution’s financial stability by
helping determine whether it has sufficient capital levels to withstand a
period of economic stress.”

The FDIC’s proposal will be
published in the Federal Register with a 60-day public comment period.

…(read more)

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