Policy Statement on the Principles for Development and Distribution of Annual Stress Test Scenarios, 72534-72537 [2013-28608]
Download as PDF
<![CDATA[
72534
Federal Register / Vol. 78, No. 232 / Tuesday, December 3, 2013 / Rules and Regulations
V. Approval of the Office of the
Secretary
The Secretary of Energy has approved
publication of today’s final rule.
List of Subjects in 10 CFR Part 430
Administrative practice and
procedure, Energy conservation,
Household appliances.
Issued in Washington, DC, on November
25, 2013.
David T. Danielson,
Assistant Secretary, Energy Efficiency and
Renewable Energy.
For the reasons set forth in the
preamble, DOE hereby amends part 430
of chapter II, subchapter D, of title 10 of
the Code of Federal Regulations, as set
forth below:
PART 430—ENERGY CONSERVATION
PROGRAM FOR CONSUMER
PRODUCTS
1. The authority citation for Part 430
continues to read as follows:
■
Authority: 42 U.S.C. 6291–6309; 28 U.S.C.
2461 note.
2. Section 430.2 is amended by
revising the definition of ‘‘Small duct,
high velocity system’’ to read as follows:
■
§ 430.2
*
*
*
*
Small duct, high velocity system
means a heating and cooling product
that contains a blower and indoor coil
combination that—
(1) Is designed for, and produces, at
least 1.2 inches of external static
pressure when operated at the certified
air volume rate of 220–350 CFM per
rated ton of cooling; and
(2) When applied in the field, uses
high velocity room outlets generally
greater than 1,000 fpm that have less
than 6.0 square inches of free area.
*
*
*
*
*
■
[FR Doc. 2013–28768 Filed 12–2–13; 8:45 am]
BILLING CODE 6450–01–P
[Amended]
3. Section 430.32 is amended:
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.
Effective Date: The final
guidance is effective January 2, 2014.
DATES:
FOR FURTHER INFORMATION CONTACT:
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.
ACTION: Final guidance.
AGENCY:
Section 165(i) of the DoddFrank 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
SUMMARY:
Definitions.
*
§ 430.32
a. In the table for paragraph (c)(2):
1. First column, by removing the
footnote designation from rows (v)(A)
and (v)(B) and adding it after ‘‘class’’ in
the heading of the first column;
■ 2. Row (vi) in the second column, by
removing ‘‘13’’ and adding in its place,
‘‘11’’, and in the third column by
removing ‘‘7.7’’ and adding in its place,
‘‘6.8’’;
■ b. In the table for paragraph (c)(3), row
(v) in the second column, by removing
‘‘13’’ and adding in its place, ‘‘12’’, and
in the third column by removing ‘‘7.7’’
and adding in its place, ‘‘7.2’’.
■
■
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.
PROCESS OVERVIEW OF ANNUAL STRESS TEST
[Using data as of September 30th]
emcdonald on DSK67QTVN1PROD with RULES
Step
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 ....
No later than November 15th .....................
No later than November 15th.
No later than January 5th ..........................
No later than March 31st.3
Between March 15th and March 31st ........
Between June 15th and June 30th.
1 Public
2 77
Law 111–203, 124 Stat. 1376 (2010).
FR 62417 (Oct. 15, 2012).
VerDate Mar<15>2010
18:06 Dec 02, 2013
Jkt 232001
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
PO 00000
Frm 00002
Fmt 4700
Sfmt 4700
Timeframe for $10 billion to $50 billion
covered banks
public disclosure on its parent bank holding
company’s or savings and loan holding company’s
timeline.
E:\FR\FM\03DER1.SGM
03DER1
Federal Register / Vol. 78, No. 232 / Tuesday, December 3, 2013 / Rules and Regulations
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.
emcdonald on DSK67QTVN1PROD with RULES
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
4 77
FR 69553 (Nov. 20, 2012).
VerDate Mar<15>2010
17:13 Dec 02, 2013
Jkt 232001
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-tomarket 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 outof-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.
PO 00000
Frm 00003
Fmt 4700
Sfmt 4700
72535
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 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
distribute those scenarios for covered
banks.
II. Stress Tests
As defined by the Stress Test Rule, a
stress test means ‘‘the process to assess
1 77
E:\FR\FM\03DER1.SGM
FR 62417 (Oct. 15, 2012).
03DER1
72536
Federal Register / Vol. 78, No. 232 / Tuesday, December 3, 2013 / Rules and Regulations
emcdonald on DSK67QTVN1PROD with RULES
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.
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
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.
VerDate Mar<15>2010
17:13 Dec 02, 2013
Jkt 232001
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 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
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).
7 Id.
at 325.202(c).
at 325.202(a).
9 Id. at 325.202(j).
8 Id.
6 Id.
PO 00000
at 325.202(i).
Frm 00004
Fmt 4700
Sfmt 4700
E:\FR\FM\03DER1.SGM
03DER1
emcdonald on DSK67QTVN1PROD with RULES
Federal Register / Vol. 78, No. 232 / Tuesday, December 3, 2013 / Rules and Regulations
• 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.
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
10 Id.
at 325.201(c).
VerDate Mar<15>2010
17:13 Dec 02, 2013
Jkt 232001
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
PO 00000
Frm 00005
Fmt 4700
Sfmt 4700
72537
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
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Parts 712 and 741
RIN 3133–AD93
Credit Union Service Organizations
National Credit Union
Administration (NCUA).
ACTION: Final rule.
AGENCY:
NCUA is issuing a final rule
to amend its credit union service
organization (CUSO) regulation to
increase transparency and address
certain safety and soundness concerns.
The final rule expands the requirements
of the CUSO regulation that apply to
federally insured, state-chartered credit
unions (FISCUs) to address accounting,
financial statements, and audits. The
final rule also includes limits on the
ability of ‘‘less than adequately
capitalized’’ FISCUs to recapitalize their
CUSOs. In addition, it adds several new
requirements that apply to both federal
credit unions (FCUs) and FISCUs.
Specifically, all CUSOs are required to
annually provide basic profile
SUMMARY:
E:\FR\FM\03DER1.SGM
03DER1
]]>Agencies
[Federal Register Volume 78, Number 232 (Tuesday, December 3, 2013)]
[Rules and Regulations]
[Pages 72534-72537]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28608]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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]
------------------------------------------------------------------------
Timeframe for $10
Timeframe for over billion to $50
Step $50 billion covered billion 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 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.
------------------------------------------------------------------------
[[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.
---------------------------------------------------------------------------
\4\ 77 FR 69553 (Nov. 20, 2012).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\1\ 77 FR 62417 (Oct. 15, 2012).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\2\ 12 CFR 325.202(l).
\3\ Id. at 325.205(b)(3).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\4\ Id. at 325.201(c)(2) and 325.203(a).
\5\ Id. at 325.205(a).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\6\ Id. at 325.202(i).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\7\ Id. at 325.202(c).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\8\ Id. at 325.202(a).
---------------------------------------------------------------------------
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:
---------------------------------------------------------------------------
\9\ Id. at 325.202(j).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\10\ Id. at 325.201(c).
---------------------------------------------------------------------------
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
