FDIC Invites Comments on Stress Test Rules

The Federal Deposit InsurancernCorporation (FDIC) has issued a notice of proposed rulemaking (NPR) forrncomment.  The NPR would require thernlarger of the banks it regulates to conduct annual capital-adequacy stressrntests.  The tests are one requirement ofrnthe Dodd-Frank Wall Street Reform Act and will affect FDIC-insured banks andrnsavings institutions with assets of more than $10 billion.  The FDIC currently has 23 financialrninstitutions meeting that criterion </p

The proposed rule focuses on capitalrnadequacy and defines a stress test as a process to assess the potential impactrnon the bank of economic and financial conditions (“scenarios”) on thernconsolidated earnings, losses, and capital of the covered bank over a setrnplanning horizon.  FDIC said that thesernstress tests would be one component of the broader stress testing activitiesrnconducted by the banks which should address the impact of a broad range ofrnpotentially negative outcomes across a broad set of risk types with impactsrnbeyond capital adequacy along.  These,rnhowever, are beyond the scope of the proposed rule.</p

Under the NPR each covered bankrnwould be required to conduct the test annually using the bank’s financial datarnas of September 30 of that year.  Wherernthe parent company structure of the covered bank includes one or more financialrncompanies, each with assets greater than the $10 billion threshold, the stressrntest requirement applies to the parent and to each subsidiary meeting the threshold,rnhowever the FDIC will coordinate with other regulatory agencies to minimizerncomplexity or duplication of effort.</p

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

The NPR also describes the contentrnof the reports institutions are required to publish, and the timeline forrnconducting the stress tests and producing the required reports.</p

FDIC Acting Chairman Martin J.rnGruenberg said, “Both the FDIC and the institutions being tested willrnbenefit from the forward-looking results that the stress tests will provide.rnThe results will assist in ensuring an institution’s financial stability byrnhelping determine whether it has sufficient capital levels to withstand arnperiod of economic stress.”</p

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

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