Policy Statement on the Principles for Development and Distribution of Annual Stress Test Scenarios, 69553-69556 [2012-28104]

Download as PDF 69553 Rules and Regulations Federal Register Vol. 77, No. 224 Tuesday, November 20, 2012 This section of the FEDERAL REGISTER contains regulatory documents having general applicability and legal effect, most of which are keyed to and codified in the Code of Federal Regulations, which is published under 50 titles pursuant to 44 U.S.C. 1510. The Code of Federal Regulations is sold by the Superintendent of Documents. Prices of new books are listed in the first FEDERAL REGISTER issue of each week. FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 325 Policy Statement on the Principles for Development and Distribution of Annual Stress Test Scenarios Federal Deposit Insurance Corporation (‘‘FDIC’’ or ‘‘Corporation’’). ACTION: Interim guidance with request for public comment. AGENCY: This interim guidance sets forth the general processes and factors to be used by the FDIC in developing and distributing the stress test scenarios for the annual stress tests required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as implemented by the Annual Stress Test final rule (‘‘Stress Test Rule’’) published on October 15, 2012.1 Under the Stress Test Rule FDIC-insured state nonmember banks and FDIC-insured state-chartered savings associations with total consolidated assets of more than $10 billion are required to conduct annual stress tests using a minimum of three scenarios (baseline, adverse and SUMMARY: severely adverse) provided by the FDIC. The Stress Test Rule specified that the FDIC will provide the required scenarios to the covered banks no later than November 15th of each year. DATES: This interim guidance is effective November 20, 2012. Comments must be submitted on or before January 22, 2013. ADDRESSES: You may submit comments by any of the following methods: • Agency Web site: https:// www.FDIC.gov/regulations/laws/ federal/propose.html. Follow the instructions for submitting comments. • Federal eRulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. • Email: comments@FDIC.gov. Include ‘‘Policy Statement on the Principles for Development and Distribution of Annual Stress Test Scenarios’’ in the subject line of the message. Comments received will be posted without change to https:// www.FDIC.gov/regulations/laws/ federal/propose.html, including any personal information provided. • Mail: Robert E. Feldman, Executive Secretary, Attention: Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429. • Hand Delivery/Courier: Guard station at the rear of the 550 17th Street Building (located on F Street), on business days between 7:00 a.m. and 5:00 p.m. (EDT). Instructions: Please use the title ‘‘Policy Statement on the Principles for Development and Distribution of Annual Stress Test Scenarios’’ to facilitate the organization and distribution of the comments. FOR FURTHER INFORMATION CONTACT: George French, Deputy Director, Policy, (202) 898–3929, Robert Burns, Associate Director, Mid-Tier Bank Branch, (202) 898–3905, or Ryan Sheller, Senior Large Financial Institutions Specialist, (202) 412–4861, Division of Risk Management and Supervision; Philip A. Shively, Chief, Economic Analysis Section, (202) 898–6790, Division of Insurance and Research; Mark G. Flanigan, Counsel, (202) 898–7426, 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 Section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires certain financial companies, including FDICinsured 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 FDIC published in the Federal Register on October 15, 2012 (77 FR 62417), the Stress Test Rule implementing the requirements and setting out definitions and rules for scope of application, scenarios, reporting, and disclosure. 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. PROCESS OVERVIEW OF ANNUAL STRESS TEST [Using data as of September 30th] Timeframe for over $50 billion covered banks 1. FDIC provides covered banks with scenarios for annual stress tests 2. Covered banks submit required regulatory reports to the FDIC on their stress tests. 3. Covered banks make required public disclosures .............................. wreier-aviles on DSK5TPTVN1PROD with Step No later than November 15th ........ No later than January 5th .............. No later than November 15th. No later than March 31st.2 Between March 15th and March 31st. Between June 15th and June 30th. A key component of the annual stress test is the development of the stress test scenarios that are provided to covered 1 77 14:35 Nov 19, 2012 Jkt 229001 banks on or before November 15th of each year. 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 2 A covered bank subsidiary may elect to report and issue its required public disclosure on its FR 62417 (Oct. 15, 2012). VerDate Mar<15>2010 Timeframe for $10 billion to $50 billion covered banks parent bank holding company’s or savings and loan holding company’s timeline. PO 00000 Frm 00001 Fmt 4700 Sfmt 4700 E:\FR\FM\20NOR1.SGM 20NOR1 69554 Federal Register / Vol. 77, No. 224 / Tuesday, November 20, 2012 / Rules and Regulations wreier-aviles on DSK5TPTVN1PROD with 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. This document articulates the principles that the FDIC will apply to develop and distribute those scenarios for covered banks. II. Immediate Effective Date and Request for Comment This interim guidance is effective November 20, 2012 and applicable, to the extent practicable, to the annual stress test cycle beginning this year. As explained in the preamble, the Stress Test Rule was effective immediately upon publication because the stress testing framework represents a critical tool for supervision and is essential for the health of covered banks and the overall financial stability of the economy.3 For this reason, FDIC believed that it was necessary for certain FDIC-insured state nonmember banks and FDIC-insured state-chartered savings associations with total consolidated assets not less than $50 billion to conduct stress tests under the Stress Test Rule this year. The stress tests conducted under the Stress Test Rule framework will provide important forward-looking information to supervisors to assist in the overall assessment of a covered bank’s capital adequacy and will help determine whether additional analytical techniques and exercises are appropriate to identify measure and monitor risk to the financial soundness of the covered bank. Moreover, the FDIC believes that the stress tests will benefit the covered banks by supporting their own forward-looking assessments of their risks and better equip them to address a range of adverse outcomes. Similarly, the FDIC believes that it is necessary to make this interim guidance effective immediately. While the FDIC recognizes that because of timing issues many of the procedural aspects of this interim guidance will not be relevant for the development of the scenarios for this year, the FDIC believes that it is important to give covered banks a sense 3 See id., at 62423. VerDate Mar<15>2010 14:35 Nov 19, 2012 of the general processes and factors used for scenario development that the FDIC expects to use going forward, and an opportunity to comment. The FDIC solicits comment on all aspects of the interim guidance. Specifically, what challenges, if any, exist in applying this guidance generally or at particular banking organizations and are there any terms described by the interim guidance that require further clarification and how should they be defined? 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 interim 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, is still pending. No new collection of information pursuant to the PRA is contained in this interim guidance. IV. Principles for Development and Distribution of Annual Stress Test Scenarios The text of the interim policy statement 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 FDICinsured 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 1 77 Jkt 229001 PO 00000 FR 62417 (Oct. 15, 2012). Frm 00002 Fmt 4700 Sfmt 4700 distribute those scenarios for covered banks. II. Stress Tests As defined by the Stress Test Rule, a stress test means ‘‘the process to assess 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. 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. 2 12 CFR 325.202(l). at 325.205(b)(3). 4 Id. at 325.201(c)(2) and 325.203(a). 5 Id. at 325.205(a). 3 Id. E:\FR\FM\20NOR1.SGM 20NOR1 Federal Register / Vol. 77, No. 224 / Tuesday, November 20, 2012 / Rules and Regulations wreier-aviles on DSK5TPTVN1PROD with 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. 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 be 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 respecifications 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. 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. 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 7 Id. at 325.202(c). at 325.202(a). 9 Id. at 325.202(j). the severely adverse scenario as it relates to the unemployment rate: • 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). • 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 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 institutions. 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 8 Id. 6 Id. at 325.202(i). VerDate Mar<15>2010 14:35 Nov 19, 2012 Jkt 229001 PO 00000 Frm 00003 Fmt 4700 10 Id. Sfmt 4700 69555 E:\FR\FM\20NOR1.SGM at 325.201(c). 20NOR1 69556 Federal Register / Vol. 77, No. 224 / Tuesday, November 20, 2012 / Rules and Regulations wreier-aviles on DSK5TPTVN1PROD with and anticipates making every effort to distribute the same scenarios to all covered banks. 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. VerDate Mar<15>2010 14:35 Nov 19, 2012 Jkt 229001 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 14th day of November 2012. Valerie J. Best, Assistant Executive Secretary. [FR Doc. 2012–28104 Filed 11–19–12; 8:45 am] BILLING CODE 6714–01–P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA–2012–0528; Directorate Identifier 2011–SW–068–AD; Amendment 39–17261; AD 2012–23–05] RIN 2120–AA64 Airworthiness Directives; Eurocopter Deutschland Helicopters Federal Aviation Administration (FAA), DOT. ACTION: Final rule. AGENCY: We are adopting a new airworthiness directive (AD) for all Eurocopter Deutschland GmbH (ECD) Model MBB–BK117 C–2 helicopters with certain Generator Control Units SUMMARY: PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 (GCU) installed. This AD requires replacing the GCUs. This AD was prompted by reports of internal short circuits in certain GCUs. These actions are intended to prevent a short circuit, which could result in a loss of electrical generating power, loss of systems required for continued safe flight and landing, and subsequent loss of control of the helicopter. DATES: This AD is effective December 26, 2012. ADDRESSES: For service information identified in this AD, contact American Eurocopter Corporation, 2701 N. Forum Drive, Grand Prairie, TX 75052, telephone (972) 641–0000 or (800) 232– 0323, fax (972) 641–3775, or at https:// www.eurocopter.com/techpub. You may review the referenced service information at the FAA, Office of the Regional Counsel, Southwest Region, 2601 Meacham Blvd., Room 663, Fort Worth, Texas 76137. Examining the AD Docket You may examine the AD docket on the Internet at https:// www.regulations.gov or in person at the Docket Operations Office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this AD, any incorporated-by-reference service information, the economic evaluation, any comments received, and other information. The street address for the Docket Operations Office (phone: 800– 647–5527) is U.S. Department of Transportation, Docket Operations Office, M–30, West Building Ground Floor, Room W12–140, 1200 New Jersey Avenue SE., Washington, DC 20590. FOR FURTHER INFORMATION CONTACT: George Schwab, Aviation Safety Engineer, FAA, Rotorcraft Directorate, Safety Management Group, 2601 Meacham Blvd., Fort Worth, Texas 76137; telephone (817) 222–5114; email george.schwab@faa.gov. SUPPLEMENTARY INFORMATION: Discussion On May 22, 2012, at 77 FR 30230, the Federal Register published our notice of proposed rulemaking (NPRM), which proposed to amend 14 CFR part 39 to include an AD that would apply to ECD Model MBB–BK117 C–2 helicopters with a GCU, part number (P/N) 51530– 021EI with no modification (MOD), MOD A, or MOD B installed. That NPRM proposed to require replacing the GCU within 300 hours time-in-service (TIS) or 6 months, whichever occurred earlier. The proposed requirements were intended to prevent loss of electrical generating power, resulting in the loss E:\FR\FM\20NOR1.SGM 20NOR1

Agencies

FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 77, Number 224 (Tuesday, November 20, 2012)]
[Rules and Regulations]
[Pages 69553-69556]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28104]

========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.

========================================================================

Federal Register / Vol. 77, No. 224 / Tuesday, November 20, 2012 /
Rules and Regulations

[[Page 69553]]

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 (``FDIC'' or
``Corporation'').

ACTION: Interim guidance with request for public comment.

-----------------------------------------------------------------------

SUMMARY: This interim guidance sets forth the general processes and
factors to be used by the FDIC in developing and distributing the
stress test scenarios for the annual stress tests required by the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010 as
implemented by the Annual Stress Test final rule (``Stress Test Rule'')
published on October 15, 2012.\1\ Under the Stress Test Rule FDIC-
insured state nonmember banks and FDIC-insured state-chartered savings
associations with total consolidated assets of more than $10 billion
are required to conduct annual stress tests using a minimum of three
scenarios (baseline, adverse and severely adverse) provided by the
FDIC. The Stress Test Rule specified that the FDIC will provide the
required scenarios to the covered banks no later than November 15th of
each year.
---------------------------------------------------------------------------

\1\ 77 FR 62417 (Oct. 15, 2012).

DATES: This interim guidance is effective November 20, 2012. Comments
---------------------------------------------------------------------------
must be submitted on or before January 22, 2013.

ADDRESSES: You may submit comments by any of the following methods:
Agency Web site: https://www.FDIC.gov/regulations/laws/federal/propose.html. Follow the instructions for submitting comments.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: comments@FDIC.gov. Include ``Policy Statement on
the Principles for Development and Distribution of Annual Stress Test
Scenarios'' in the subject line of the message. Comments received will
be posted without change to https://www.FDIC.gov/regulations/laws/federal/propose.html, including any personal information provided.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street NW., Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street), on business days
between 7:00 a.m. and 5:00 p.m. (EDT).
Instructions: Please use the title ``Policy Statement on the
Principles for Development and Distribution of Annual Stress Test
Scenarios'' to facilitate the organization and distribution of the
comments.

FOR FURTHER INFORMATION CONTACT: George French, Deputy Director,
Policy, (202) 898-3929, Robert Burns, Associate Director, Mid-Tier Bank
Branch, (202) 898-3905, or Ryan Sheller, Senior Large Financial
Institutions Specialist, (202) 412-4861, Division of Risk Management
and Supervision; Philip A. Shively, Chief, Economic Analysis Section,
(202) 898-6790, Division of Insurance and Research; Mark G. Flanigan,
Counsel, (202) 898-7426, 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

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 FDIC
published in the Federal Register on October 15, 2012 (77 FR 62417),
the Stress Test Rule implementing the requirements and setting out
definitions and rules for scope of application, scenarios, reporting,
and disclosure. 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.

Process Overview of Annual Stress Test
[Using data as of September 30th]
------------------------------------------------------------------------
Timeframe for $10
Timeframe for over billion to $50
Step $50 billion billion covered
covered banks banks
------------------------------------------------------------------------
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 required No later than No later than
regulatory reports to the FDIC January 5th. March 31st.\2\
on their stress tests.
3. Covered banks make required Between March 15th Between June 15th
public disclosures. and March 31st. and June 30th.
------------------------------------------------------------------------

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. 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

[[Page 69554]]

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. This document articulates the principles that the FDIC will
apply to develop and distribute those scenarios for covered banks.
---------------------------------------------------------------------------

\2\ A covered bank subsidiary 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.
---------------------------------------------------------------------------

II. Immediate Effective Date and Request for Comment

This interim guidance is effective November 20, 2012 and
applicable, to the extent practicable, to the annual stress test cycle
beginning this year. As explained in the preamble, the Stress Test Rule
was effective immediately upon publication because the stress testing
framework represents a critical tool for supervision and is essential
for the health of covered banks and the overall financial stability of
the economy.\3\ For this reason, FDIC believed that it was necessary
for certain FDIC-insured state nonmember banks and FDIC-insured state-
chartered savings associations with total consolidated assets not less
than $50 billion to conduct stress tests under the Stress Test Rule
this year. The stress tests conducted under the Stress Test Rule
framework will provide important forward-looking information to
supervisors to assist in the overall assessment of a covered bank's
capital adequacy and will help determine whether additional analytical
techniques and exercises are appropriate to identify measure and
monitor risk to the financial soundness of the covered bank. Moreover,
the FDIC believes that the stress tests will benefit the covered banks
by supporting their own forward-looking assessments of their risks and
better equip them to address a range of adverse outcomes. Similarly,
the FDIC believes that it is necessary to make this interim guidance
effective immediately. While the FDIC recognizes that because of timing
issues many of the procedural aspects of this interim guidance will not
be relevant for the development of the scenarios for this year, the
FDIC believes that it is important to give covered banks a sense of the
general processes and factors used for scenario development that the
FDIC expects to use going forward, and an opportunity to comment.
---------------------------------------------------------------------------

\3\ See id., at 62423.
---------------------------------------------------------------------------

The FDIC solicits comment on all aspects of the interim guidance.
Specifically, what challenges, if any, exist in applying this guidance
generally or at particular banking organizations and are there any
terms described by the interim guidance that require further
clarification and how should they be defined?

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 interim 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, is still pending. No
new collection of information pursuant to the PRA is contained in this
interim guidance.

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

The text of the interim policy statement 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 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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[[Page 69555]]

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 be 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).
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 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 institutions. 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

[[Page 69556]]

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 14th day of November 2012.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2012-28104 Filed 11-19-12; 8:45 am]
BILLING CODE 6714-01-P

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