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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF BANKING

SUPERVISION AND REGULATION

SR 12-7

May 14, 2012

TO THE OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY 

AND EXAMINATION STAFF AT EACH FEDERAL RESERVE BANK AND TO 

BANKING ORGANIZATIONS SUPERVISED BY THE FEDERAL RESERVE

SUBJECT: Supervisory Guidance on Stress Testing for Banking Organizations with More 

Than $10 Billion in Total Consolidated Assets

The Federal Reserve, together with the Office of the Comptroller of the Currency (OCC) 

and the Federal Deposit Insurance Corporation (FDIC) (collectively, the “agencies”), has issued

the attached Guidance on Stress Testing for Banking Organizations with Total Consolidated 

Assets of More Than $10 Billion. The guidance is intended to emphasize the importance of 

stress testing as an ongoing risk management practice that supports banking organizations’ 

forward-looking assessment of risks and better equips them to address a range of adverse 

outcomes.

This joint guidance is applicable to all institutions supervised by the agencies with more

than $10 billion in total consolidated assets. Specifically, with respect to the Federal Reserve, 

these banking organizations include state member banks, bank holding companies, savings and 

loan holding companies, and all other institutions with more than $10 billion in total 

consolidated assets for which the Federal Reserve is the primary federal supervisor.

1

Summary of the Guidance

For purposes of the guidance, “stress testing” refers to exercises used to conduct a 

forward-looking assessment of the potential impact of various adverse events and circumstances 

on a banking organization. An effective stress testing framework provides a comprehensive, 

 

1 Given the unique structure of U.S. branches and agencies of foreign banking organizations, the agencies recognize 

that certain aspects of this guidance may not apply to those U.S. branches and agencies (such as the portions related 

to capital stress testing) or may apply differently (such as the portions related to governance and controls). 

Supervisors can work with these entities on a case-by-case basis to identify the portions of the guidance that are 

most relevant for them.

Applicability to Community Banking Organizations: This guidance does not apply to 

community banking organizations, defined as institutions supervised by the Federal 

Reserve with total consolidated assets of $10 billion or less.
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integrated, and forward-looking set of activities for a banking organization to employ in order to 

assist in the identification and measurement of its material risks and vulnerabilities. Material 

risks and vulnerabilities may manifest themselves during stressful economic or financial 

environments, or arise from firm-specific adverse events. A banking organization should 

develop and implement its stress testing framework in a manner commensurate with its size, 

complexity, business activities, and overall risk profile.

As described in the guidance, a banking organization should apply the following five 

principles when designing and implementing a stress testing framework:

 Principle 1: A banking organization’s stress testing framework should include 

activities and exercises that are tailored to and sufficiently capture the banking 

organization’s exposures, activities, and risks.

 Principle 2: An effective stress testing framework employs multiple conceptually 

sound stress testing activities and approaches.

 Principle 3: An effective stress testing framework is forward-looking and flexible.

 Principle 4: Stress testing results should be clear, actionable, well supported, and 

inform decision-making.

 Principle 5: An organization’s stress testing framework should include strong 

governance and effective internal controls.

The guidance also describes several approaches and applications that banking

organizations should consider using, such as scenario analysis, sensitivity analysis, enterprisewide stress testing, and reverse stress testing. Organizations should also recognize that stress 

testing approaches will evolve over time and they should update their practices as needed. 

Given the importance of capital and liquidity to a banking organization’s viability, the 

guidance also emphasizes the use of stress testing in these two areas in particular, including an 

evaluation of the interaction between capital and liquidity, and the potential for both to become 

impaired at the same time. Stress testing for capital and liquidity adequacy should be conducted 

in coordination with a banking organization’s overall strategy and annual planning cycles. 

Results should be refreshed in the event of major strategic decisions, or other decisions that can 

materially impact capital or liquidity.

Federal Reserve Banks are asked to distribute this letter to banking organizations 

supervised by the Federal Reserve, as well as to their own supervisory and examination staff.

Questions regarding this letter should be directed to: Constance M. Horsley, Manager, Capital 

and Regulatory Policy (202) 452-5239; David Palmer, Senior Supervisory Analyst, Risk Section, 

(202) 452-2904; or Sean Healey, Financial Analyst, Capital and Regulatory Policy, (202) 912-

4611, Division of Banking Supervision and Regulation. In addition, questions may be sent via the 

Board’s public website.2

Michael S. Gibson

Director

 

2

 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.
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Attachment:

 Guidance on Stress Testing for Banking Organizations with Total Consolidated 

Assets of More Than $10 Billion

Cross-references to:

 SR letter 11-11, “Supervision of Savings and Loan Holding Companies (SLHCs)”

 SR letter 11-7, “Guidance on Model Risk Management”

 SR letter 10-6, “Interagency Policy Statement on Funding and Liquidity Risk 

Management”

 SR letter 10-1, “Interagency Advisory on Interest Rate Risk”

 SR letter 09-4, “Applying Supervisory Guidance and Regulations on the Payment of 

Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies”

 SR letter 07-1, “Interagency Guidance on Concentrations in Commercial Real Estate”

 SR letter 01-4, “Subprime Lending”

 SR letter 99-18, “Assessing Capital Adequacy in Relation to Risk at Large Banking 

Organizations and Others with Complex Risk Profiles”