FDIC Issues Rules on Stress Tests for $10B-Plus Banks

The Federal Deposit Insurance Corp. has issued its proposed rules for U.S. banks to self-administer “capital adequacy” stress tests in the case of future economic downturns or crises.
The tests will determine if banks with consolidated assets of more than $10 billion can maintain sufficient capital levels during scenarios involving national or international upheavals.
The annual stress tests are mandated under the Dodd-Frank financial system reform enacted in 2010. These tests apply to FDIC-insured state nonmember banks and FDIC-insured state-chartered savings associations. The FDIC regulated 23 state non-member banks with total assets of more than $10 billion as of Sept. 30, 2011.
The FDIC would provide banks with three economic scenarios for the future by mid-November of each year. By Jan. 5, banks will be required to send the FDIC a report on how the institution would handle the scenarios. The reports would be published 90 days after that.
The rules resemble those proposed by the Federal Reserve last year that provide a guide for Fed examiners to administer stress tests to institutions with assets of more than $50 billion.
“Both the FDIC and the institutions being tested will benefit from the forward-looking results that the stress tests will provide,” said FDIC Acting Chairman Martin J. Gruenberg said. “The results will assist in ensuring an institution’s financial stability by helping determine whether it has sufficient capital levels to withstand a period of economic stress.”
The FDIC anticipates that the required report from the banks on the stress tests would include (but not necessarily be limited to) the following qualitative and quantitative information:
Qualitative information:

  • A general description of the use of stress tests required by the proposed rule in the bank’s capital planning and capital adequacy assessments;
  • A description of the types of risks (e.g., credit, market, operational, etc.) being captured in the stress test;
  • A general description of the methodologies employed to estimate losses, pre-provision net revenues, loan loss reserves, changes in capital levels and ratios, and changes in the bank’s balance sheet over the planning horizon;
  • Assumptions about potential capital distributions over the planning horizon; and;
  • Any other relevant qualitative information to facilitate supervisory assessment of the tests, upon request by the Corporation.

Quantitative information under each scenario:

  • Estimated pro forma capital levels and capital ratios, including regulatory and any other capital ratios specified by the Corporation;
  • Estimated losses by exposure category;
  • Estimated pre-provision net revenue;
  • Estimated changes in loan loss reserves;
  • Estimated total assets and risk-weighted assets;
  • Estimated aggregate loan balances;
  • Potential capital distributions over the planning horizon; and
  • Any other relevant quantitative information to facilitate supervisory understanding of the tests, upon request by the primary supervisor of the covered bank.

The FDIC has published its proposed rules for the customary 60-day public feedback period: Stress Testing Requirements for Certain Banks.

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