DATE: October 15, 2019

MEMORANDUM TO: The Board of Directors

FROM: Doreen R. Eberley

Director 

Division of Risk Management Supervis'

SUBJECT: Final Rule: Company-Run Stress Testing Requirements for FDICsupervised State Nonmember Banks and State Savings

Associations

Recommendation: Staff recommends that the FDIC Board of Directors ("FDIC Board")

approve the attached final rule entitled "Company-Run Stress Testing Requirements for FDICsupervised State Nonmember Banks and State Savings Associations" ("final rule"). The final

rule would codify amendments to the FDIC's stress testing regulations at 12 CFR Part 325 ("Part

325") that were proposed by the FDIC on December 28, 2018 ("proposed rule or proposal").

These amendments would be adopted as proposed and would implement section 401 of the

Economic Growth, Regulatory Relief, and Consumer Protection Act ("EGRRCPA") by: (1)

raising Part 325's applicability threshold from $10 billion to $250 billion, (2) revising the

frequency of required stress tests, and (3) reducing the number of required stress testing

scenarios from three to two. The final rule would also make certain conforming and technical

changes, including some previously included in an Apri12, 2018 notice of proposed rulemaking

("April NPR") that was largely superseded by the enactment of EGRRCPA. FDIC staff

developed the final rule in coordination with staff of the Board of Governors of the Federal

Reserve System ("FRB") and the Office of the Comptroller of the Currency ("OCC"), and

anticipates that the FRB and OCC will issue consistent and comparable final rules. If approved,

Concurrence:

Nicholas J. Podsiady

General Counsel
the final rule will be published in the Fedef°al RegisteN with an effective date 30 days after 

publication. 

Background 

As originally enacted,section 165(1)(2)ofthe Dodd-Frank Wall Street Reform and 

Consumer Protection Actl("Dodd-Frank Act")required a financial company,including an 

insured depository institution with total consolidated assets ofmore than $10 billion and 

regulated by a primary federal regulatory agency,to conduct annual company-run stress tests 

("stress tests"), and required,among other things,the use of"baseline,""adverse," and"severely 

adverse" scenarios. Section 165(i)(2)(C)also requires each primary federal regulator to issue 

consistent and comparable rules to implementthe annual stress testing requirements. In October 

2012,the FDIC,FRB,and OCCissued such rules,2 with the FDIC's rules incorporated in Part 

325.3 

Section 401 ofEGRRCPA amended section 165(1)(2)by: (1)raising the minimum asset 

threshold for stress tests from $10 billion to $250 billion;(2)replacing the requirementfor 

"annual"stress tests with arequirementfor "periodic" stress tests; and(3)eliminating the 

"adverse"scenario requirement. The EGRRCPA amendments become effective on November 

24,2019(eighteen months after enactment). 

The April NPR proposed certain revisions to Part 3254that are no longer relevant as a 

result ofEGRRCPA's enactment.5 However,other revisions originally proposed in the April 

1 12 U.S.C.§ 5365(1). 

z 77FR62417(October 15,2012)(FDIC);77FR62380(October 12,2012)(FRB);77FR61238 (October 9,2012) 

(OCC). 

3 The FDIC's stress test rule was originally incorporated as Subpart C ofPart 325. Following the rescission of 

Subparts A and B ofPart 325,Part 325 consists exclusively ofthe stress test rule and the stress test rule is no longer 

designated as Subpart C.83 FR 17737(Apri124,2018). 

483 FR 13880(Apri12,2018). 

5 Notably,Part 325 differentiates between"$10 to $50 billion covered banks" and "over $50 billion covered banks," 

with different requirements applying to each subcategory,and the April NPRproposed extending the transition 

2 
NPRremain necessary in order to maintain consistency among the FDIC's,FRB's,and OCC's 

stress testing regulations applicable to insured depository institutions. 

Summary ofthe Proposed Rule 

On December 28,2018,the FDIC published the proposed rule in the FederalRegisteN to 

amend Part 325 consistent with section 401 ofEGRRCPA. Specifically,the proposal would 

have raised the applicability threshold for covered banks required to conduct stress tests from 

$10 billion to $250 billion,reduced the frequency by which covered banks would generally be 

required to conduct stress tests from annually to biennially, and eliminated the requirement that 

covered banks use the "adverse"scenario when conducting stress tests. The proposal also 

included various technical changes to facilitate the above revisions, a proposed transition period, 

and proposed revisions to the regulation's reservation ofauthority, as well as the necessary 

revisions initially proposed in the April NPR,such as extending the as-ofdate range for trading 

and counterparty components for covered banks with significant trading activities. 

Summary of Comments on the Proposed Rule 

The FDIC received six comments in response to the proposed rule.6 With respect to raising 

the applicability threshold from $10to $250 billion, some commenters supported raising the 

threshold,others acknowledged that such a revision was statutorily required,and others 

expressed concern about eliminating stress testing requirements for banks under $250 billion. 

With respect to the removal ofthe"adverse"scenario,some commenters supported the proposed 

period in which covered banks that migrated from"$10 to $50 billion covered banks"to "over $50 billion covered 

banks" would have to comply with the requirements applicable to "over $50 billion covered banks." Section 401 of 

EGRRCPA renders this aspect ofthe April NPR mootby requiring stress testing by financial companies with over 

$250 billion in total consolidated assets. 

6 Comments are available on the FDIC's website at: https://www.fdc.~ovheffulations/laws/federall2018/2018-

compan~run-stress-tes~tin~ requirements-3064-ae84.hhn1. 
rule's elimination ofthe "adverse"scenario, some acknowledged that removing the"adverse" 

scenario is statutorily required,and others expressed concern that eliminating the "adverse" 

scenario mayreduce the efficacy ofcompany-run stress testing. 

With respect to the proposed rule's requirement that covered banks generally be subject to 

biennial stress testing,some commenters supported this as an appropriate frequency for most 

covered banks,while others contended that changing the frequency from annual to biennial 

would not be appropriate and raised risk managementand testing credibility concerns. 

The Finai Rule 

Staffrecommends that the Board adoptthe final rule without change as described in 

detail below. 

CoveredBanks 

Section 401 ofEGRRCPA raised the applicability threshold for company-run stress 

testing by financial companiesfrom $10 billion to $250 billion. Like the proposed rule,the final 

rule would eliminate the two existing subcategories of"covered bank"—"$10to $50 billion 

covered bank"and"over $50 billion covered bank"—and would revise the term "covered bank" 

to mean a state nonmember bank or state savings association with average total consolidated 

assets that are greater than $250 billion. In addition,the final rule would make certain technical 

and conforming changes to 12 CFRPart 325 in order to consolidate requirements,such as those 

related to reporting and publication,that are currently referenced separately with respectto $10 

billion to $50 billion covered banks and over $50 billion covered banks. 

~ One commenterrecommended thatthe FDIC,OCC,and FRB not include the adverse scenario in the 2019 stress 

tests. The FDIC did not consider it necessary to do so,and notes thatthe EGRRCPA amendments to the DoddFrank Act's company-run stress testing requirements are effective November24,2019. 

C! 
Frequency ofstress testing 

Section 401 ofEGRRCPA changed the requirement under section 165 ofthe Dodd-Frank 

Actto conduct stress tests from "annual"to "periodic." The final rule would provide that, in 

general, an FDIC-supervised institution that is a covered bank as ofDecember 31,2019,would 

be required to conduct,report, and publish a stress test once every two years, beginning on 

January 1,2020,and continuing every even-numbered year thereafter (i.e., 2022, 2024, 2026, 

etc.). The final rule would add a new defined term,"reporting year,"to the definitions at 12 CFR 

§ 325.2. A covered bank's reporting year would be the year in which a covered bank must 

conduct,report,and publish its stress test. As noted above,the reporting year for most covered 

banks would generally be every even-numbered year. 

Under the final rule, certain covered banks maybe required to conduct stress tests 

annually. This subset ofcovered banks would be limited to those that are consolidated under 

holding companies that are required to conduct stress tests more frequently than once every other 

year. On October 10,2019,the FRB adopted afinal rule that would establish risk-based 

categories for determining the application ofprudential standards,including stress testing.$ The 

final rule distinguishes between four risk-based categories for holding companies. Three ofthese 

categories—"Category I"bank holding companies,"Category II" bank holding companies,and 

"Category III" bank holding companies—would be required to conduct company-run stress tests. 

Category I holding companies,which are those that are global systemically important bank 

holding companies,and Category II holding companies would be required to conduct company-

$ See `Prudential Standards for Large Bank Holding Companies and Savings and Loan Holding Companies,"83 FR 

61408(Nov.29,2018). 
run stress tests annually, while Category III holding companies would be required to conduct 

company-run stress tests biennially.9 

Because the final rule would require a covered institution to conduct stress tests annually 

ifits parent holding company is required to do so under FRB regulations,the FDIC's stress 

testing regulation would incorporate by reference the changes to stress testing frequency in the 

FRB's regulations. This treatment aligns with the FDIC's,OCC's,and FRB's long-standing 

policy ofapplying similar standards to holding companies and their subsidiary banks,and 

reflects the FDIC's expectation that covered banks that would be required to stress test on an 

annual basis would be subsidiaries ofthe largest and most systemically important banking 

organizations,(i.e., under the FRB'sfinal rule,subsidiaries ofglobal systemically important 

bank holding companies or bank holding companies that have $700 billion or more in total assets 

or crossjurisdictional activity of$75 billion). There are currently no FDIC-supervised covered 

banks that are subsidiaries ofbank holding companies that would be required to conduct annual 

company-run stress tests under the FRB'sfinal rule. 

For covered banks that are required to conduct stress tests biennially or annually,the 

dates and deadlines in the final rule would apply for each reporting year for a covered bank. For 

example,a biennial stress testing covered bank preparing its 2022 stress test would rely on 

financial data available as ofDecember 31,2021;use stress test scenarios that would be provided 

by the FDIC no later than February 15,2022;provide its report ofthe stress test to the FDIC by 

Apri15,2022;and publish asummary ofthe results ofits stress test in the period starting June 15 

and ending July 15 of2022. 

9 A Category III holding company would be a holding company that is not a Category II holding company and that 

has(1)$250 billion or more in average total consolidated assets or(2)$100 billion or more in average total 

consolidated assets and $75 billion or more in total consolidated assets in one ofthree risk indicators. 
Removalof"Adverse"ScenaNio 

Underthe final rule,the number ofrequired stress test scenarios would be reduced from 

three to two. The"adverse" stress-testing scenario has provided limited incremental information 

to the FDIC and market participants beyond whatthe"baseline" and "severely adverse" stress 

testing scenarios provide. The final rule would remove the"adverse"scenario in the FDIC's 

stress testing rule and maintain the requirements to conduct stress tests under the "baseline" and 

"severely adverse" stress testing scenarios. The final rule also would amend the definition of 

"severely adverse scenario" so that the term is defined relative to the "baseline scenario," rather 

than the "adverse scenario." 

TNansition processfor covered banks 

Currently, 12 CFR § 325.3 provides for atransition period between when a bank becomes 

a covered bank and when the bank mustreport its first stress test. The final rule would revise the 

transition period in 12 CFR§ 325.3 to conform to the other changes in the final rule. 

Accordingly,a state nonmember bank or state savings association that becomes a covered bank 

after December 31,2019,would conductits first stress test under this partin the first reporting 

year that begins more than three calendar quarters after the date the state nonmember bank or 

state savings association becomes a covered bank. For example,ifa covered bank that conducts 

stress tests on a biennial basis becomes a covered bank on March 31 ofanon-reporting year 

(e.g.,2023),the bank would report its first stress test in the subsequent calendar year (i.e., 2024), 

which is its first reporting year. Ifthe same bank becomes a covered bank on April 1 ofa nonreporting year(e.g.,2023),it would skip the subsequent reporting calendar year and the 

following,non-reporting calendar year, and would report its first stress test in the next reporting 

year(i.e., 2026). As with other aspects ofthe stress test rule,the rule reserves to the FDIC the 
authority to change the transition period for a particular covered bank,as appropriate in light of 

the nature and level ofthe activities, complexity,risks, operations, and regulatory capital ofthe 

covered bank,in addition to any other relevant factors.lo 

The final rule would not establish atransition period for covered banks that movefrom a 

biennial stress testing requirement to an annual stress testing requirement. Accordingly,a 

covered bank that becomes subject to annual stress testing would be required to begin stress 

testing annually as ofthe next reporting year. To the extent that particular circumstances warrant 

the extension ofa transition period,the rule allows for a modification under the FDIC's 

reservation ofauthority and supervisory discretion. 

Currently, 12 CFR § 325.5(a)(2)requires a covered bank's board ofdirectors, or a 

committee thereof,to approve and review the policies and procedures ofthe stress testing 

processes as frequently as economic conditions or the bank's condition may warrant,but no less 

than annually. The final rule would revise the frequency ofthis requirementfrom "annual"to 

"once every reporting year"in order to make review by the board ofdirectors consistent with the 

covered bank's stress testing cycle. 

Additionally, 12 CFR§ 325.1(c)currently includes areservation ofauthority, pursuant to 

which the FDIC mayrevise the frequency and methodology ofthe stress testing requirement as 

appropriate for a particular covered bank. The final rule would amend the reservation of 

authority by clarifying the FDIC's authority to exempt a covered bankfrom the requirement to 

conduct a stress test in a particular reporting year. 

l0 12 CFR§ 325.1(c). 
New Range ofAs-ofDatesfog Trading Scenario Component 

Under 12 CFR § 325.4(c),the FDIC mayrequire a covered bank with significant trading 

activities to include trading and counterparty components in its adverse and severely adverse 

scenarios. The trading data to be used in this componentis as ofa date between January 1 and 

March 1 ofa calendar year.11 On February 3,2017,the FRB published a final rule that extended 

this range to runfrom October 1 ofthe calendar year preceding the year ofthe stress test to 

March 1 ofthe calendar year ofthe stress test.12 On February 23,2018,the OCCpublished a 

final rule making the same change to its stress testing regulation.13 The FDIC's April NPR and 

the proposed rule included this change.14 Accordingly,the final rule would extend the range of 

as-ofdates from October 1 ofthe preceding calendar year to March 1 ofthe calendar year ofthe 

stress test, in order to ensure consistency with the FRB's and OCC's rules and increase the 

FDIC's flexibility to choose an appropriate as-ofdate. 

Other changes 

As originally proposed in the April NPR and in the proposed rule,the final rule would 

remove certain obsolete transitional language in 12 CFR § 325.3 that wasincluded to facilitate a 

2014 shift in the dates ofthe annual stress testing cycle.ls Thattransition is now complete and 

the regulatory transition language is no longer necessary. 

Additionally,in order to update and standardize the language used in Part 325,references 

to "this subpart" would be changed to "this part"following the redesignation ofthe FDIC's 

11 12 CFR 325.4(c). 

12 82FR9308(Feb 3,2017).

13 g3 FR7951(Feb.23,2018). 

14 g3 FR 13880(April2,2018). 

is 79FR69365(Nov.21,2014). 

L~ 
stress test rule from Subpart Cof12 CFRPart 325 to occupy all ofPart 325.16 Lastly,the final 

rule would eliminate the reference to supervisory guidance in 12 CFR 325.5(b)(1).17 

Expected Effects ofthe Final Rule 

As described above,the final rule would conform Part 325 to section 165(1)(2), as 

amended by section 401 ofEGRRCPA,to raise the applicability threshold from $10 billion to 

$250 billion. Currently,there are no state nonmember banks and state savings associations that 

exceed this $250 billion threshold. Therefore,Part 325,as amended by the final rule, would not 

immediately apply to any FDIC-supervised institutions. 

Conclusion 

Staffrecommendsthatthe Board approve publication ofthe attached final rule in the 

FederalRegisteN with an effective date 30 days after publication. 

Staff Contacts 

Pete Hirsch,Division ofRisk Management Supervision,(202)898-6751 

Ryan Sheller, Division ofRisk Management Supervision,(202)412-4861 

Benjamin Klein,Legal Division,(202)898-7027 

16 g3 FR 17737(Apr.24,2018). 

17 See Interagency Statement Clarifying the Role ofSupervisory Guidance,Financial Institution Letter 49-2018 

(Sep. 11,2018). 

10