Source: https://www.federalregister.gov/documents/2012/10/09/2012-24608/annual-stress-test
Timestamp: 2018-12-16 10:28:22
Document Index: 217354833

Matched Legal Cases: ['art 3', 'art 167', 'art 3', 'art 3', 'art 3', 'art 167', 'art 167', '§\u20091320', 'art 1320', '§\u200946', '§\u200946', '§\u200946', '§\u200946', '§\u200946', '§\u200946', '§\u20094', '§\u20094', '§\u200946']

61238-61248 (11 pages)
https://www.federalregister.gov/d/2012-24608 https://www.federalregister.gov/d/2012-24608
Section 165(i) of the Dodd-Frank Act [1] requires two types of stress testing: (1) Stress tests conducted by the company and (2) stress tests conducted by the Board of Governors of the Federal Reserve System (“Board”). Section 165(i)(2) requires certain financial companies, including national banks and Federal savings associations, to conduct stress tests and requires the Federal primary financial regulatory agency [2] of those financial companies to issue regulations implementing the stress test requirements. A national bank or Federal savings association must conduct a stress test if its total consolidated assets are more than $10 billion. Under section 165(i)(2), a financial company is required to submit to the Board and to its primary financial regulatory agency a report at such time, in such form, and containing such information as the primary financial regulatory agency may require.[3] The primary financial regulatory agency is required to define “stress test,” establish methodologies for the conduct of the company-conducted stress test that must include at least three different sets of conditions (baseline, adverse, and severely adverse), establish the form and content of the institution's report, and compel the institution to publish a summary of the results of the Dodd-Frank Act institutional stress tests.[4]
In addition to the company-run stress tests required under section 165(i)(2), section 165(i)(1) requires the Board to conduct annual analyses of nonbank financial companies supervised by the Board and bank holding companies with total consolidated assets equal to or greater than $50 billion to determine whether such companies have the capital, on a total consolidated basis, necessary to absorb losses as a result of adverse economic conditions.[5] The Board published a proposed rule implementing this supervisory stress testing on January 5, 2012.[6]
The OCC published a notice of proposed rulemaking in the Federal Register on January 24, setting forth definitions and rules for scope of application, scenarios, data collection, reporting, and disclosure.[7] The OCC received 19 comment letters on the proposal. Commenters included banks, industry groups, nonprofit organizations, and individuals. Commenters generally expressed support for the proposed rule and stress testing in general, but several recommended changes to certain provisions of the proposed rule. Many commenters also strongly urged the OCC to coordinate with the Board and Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “agencies”) to make the agencies' rules on annual stress tests consistent. After careful consideration of these comments, the OCC has modified the proposed rule in certain respects in response to the comments.
The OCC recognizes that institutions are at different stages in developing their stress testing frameworks and that the agencies only recently issued stress testing guidance.[8] Therefore, although this rule will apply to all covered institutions, this final rule establishes two categories of covered institutions. The first category consists of national banks and Federal savings associations with average total consolidated assets greater than $10 billion but less than $50 billion, hereinafter referred to as “$10 to $50 billion covered institutions.” The second category consists of national banks and Federal savings associations with average total consolidated assets of $50 billion or more, hereinafter referred to as “over $50 billion covered institutions.” The OCC is providing a one year delay for $10 to $50 billion covered institutions. This delay will allow these covered institutions to continue to develop and implement a robust stress testing framework.
The final rule states that covered institutions must consider the results of stress tests conducted under the rule in the normal course of business, including, but not limited to, the covered institution's capital planning, assessment of capital adequacy, and risk management practices. The OCC believes, as discussed in interagency guidance on stress testing published in May 2012, that stress tests are an important tool for a variety of decisions made by covered institutions.[9] Such decisions include those related to capital planning and capital adequacy processes, as well as risk management more generally. However, as that guidance notes, such decisions should not be based solely on the results of any single set of stress tests. Rather, covered institutions should consider a range of relevant information when determining appropriate actions. With regard to stress testing, the interagency guidance notes that an effective stress testing framework is part of broader risk management and governance processes and should encompass a broader set of activities and exercises rather than relying on any single test or type of test.
One commenter urged the agencies to develop common reporting requirements. The OCC recognizes that many covered institutions with consolidated total assets of $50 billion or more have been subject to stress testing requirements under the Board's CCAR. The OCC also recognizes that these institutions' stress tests will be applied to more complex portfolios and therefore warrant a broader set of reports to capture adequately the results of the company-run stress tests. These reports will necessarily require more detail than would be appropriate for smaller, less complex institutions. Therefore, in response to comments, the OCC has decided to specify separate reporting templates for covered institutions with total consolidated assets between $10 and $50 billion and for covered institutions with total consolidated assets of $50 billion or more. The OCC published for notice and comment specific annual stress test reporting requirements for over $50 billion covered institutions in a separate final information collection under the Paperwork Reduction Act (44 U.S.C. 3501-3521).[10] The OCC, in consultation with the other agencies, is working to develop a more streamlined reporting template to be used by $10 to $50 billion covered institutions subject to the annual stress test rule. The OCC does not expect the reporting requirements for covered institutions to differ materially across agencies.
The OCC notes, however, as discussed in the Paperwork Reduction Act notice for the reporting templates for the over $50 billion covered institutions, that the OCC will require covered institutions to submit supporting documentation that: (i) clearly describes the methodology used to produce the stress test projections; (ii) explains how the macroeconomic factors were translated into a covered institution's projections; and (iii) explains the technical details of any underlying statistical methods used. Where company-specific assumptions are made that differ from the broad macroeconomic assumptions incorporated in stress scenarios provided by the OCC, the documentation must also describe such assumptions and how those assumptions relate to reported projections.[11]
The OCC expects that the annual stress tests required under the final rule will be only one component of the broader stress testing activities conducted by covered institutions. In this regard, the OCC notes that the agencies have recently issued final joint guidance on “Stress Testing for Banking Organizations with More Than $10 Billion in Total Consolidated Assets.” [12] These broader stress testing activities should address the impact of a range of potentially adverse outcomes across a set of risk types affecting aspects of the covered institution's financial condition including, but not limited to, capital adequacy. In addition, a full assessment of a covered institution's capital adequacy should take into account a range of factors, including evaluation of its capital planning processes, the governance over those processes, regulatory capital measures, results of supervisory stress tests where applicable, and market assessments.
The determination as to whether a national bank or Federal savings association is a covered institution is based upon the institution's total consolidated assets averaged over the four most recent consecutive quarters, as reported on the institution's Call Reports for those quarters.[13] The exact date on which the institution becomes a covered institution is the as-of date of the fourth consecutive Call Report. Unless the OCC determines otherwise, a covered institution will remain subject to the annual stress test requirements under this final rule until its total consolidated assets for each of the four most recent consecutive quarters, as reported on the institution's Call Reports for those quarters, are $10 billion or less.
The final rule requires each covered institution to use the annual stress test scenarios provided by the OCC in conducting its annual stress tests. Each covered institution must use a planning horizon of at least nine quarters over which the impact of specified scenarios would be assessed. The nine-quarter planning horizon would permit the covered institution to make informed projections of its financial and capital positions for a two-calendar-year period. The covered institution is required to calculate, for each quarter-end within the planning horizon, estimates of pre-provision net revenues (“PPNR”), potential losses, loan loss provisions, and net income that result from the conditions specified in each scenario. A covered institution also is required to calculate, for each quarter-end within the planning horizon, the potential impact on its regulatory capital levels and ratios applicable to the institution under 12 CFR part 3 or 12 CFR part 167, incorporating the effects of any expected capital actions over the planning horizon. The applicable regulatory capital levels and ratios include, for national banks, Minimum Leverage Capital Ratio Requirement (12 CFR 3.6), Risk-Based Capital Guidelines based on Basel I (Appendix A to Part 3), Risk-Based Capital Guidelines; Market Risk Adjustment (Appendix B to Part 3), and Internal-Ratings-Based and Advanced Measurement Approaches under Basel II (Appendix C to Part 3), and for Federal savings associations, Regulatory Capital Requirements (12 CFR part 167) and Risk-Based Capital Requirements and Internal-Ratings-Based and Advanced Measurement Approaches (Appendix C to part 167).[14] A covered institution also is required to calculate the potential impact on any other capital ratios specified by the OCC. The stress test must incorporate maintenance by the institution of an allowance for loan losses that would be appropriate for credit exposures throughout the planning horizon.
The final rule also requires each covered institution to establish and maintain a system of controls, oversight, and documentation, including policies and procedures, designed to ensure that the stress testing processes used by the covered institution are effective in meeting the requirements of the final rule. The covered institution's policies and procedures must, at a minimum, outline the covered institution's stress testing practices and methodologies, and processes for validating and updating its stress testing practices consistent with relevant supervisory guidance.[15] The covered institution's board of directors, or a committee thereof, must approve and review the policies and procedures related to stress testing of the covered institution as frequently as economic conditions or the condition of the institution may warrant, but at least annually. The covered institution's senior management must establish and maintain a system of controls, oversight, and documentation designed to ensure that the stress test processes satisfy the requirements under this final rule. The board of directors and senior management must be provided with a summary of the stress test results.
Specifically, the final rule requires that each over $50 billion covered institution submit a report of the stress test results and documentation to the OCC and to the Board by January 5. The OCC published for notice and comment specific annual stress test reporting requirements for over $50 billion covered institutions in a separate final information collection under the Paperwork Reduction Act (44 U.S.C. 3501-3521).[16] For $10 to $50 billion covered institutions, the final rule requires that each institution submit a report of the stress test results to the OCC and to the Board by March 31. This final rule makes clear that the annual stress test report, and any other information that the OCC may require to be provided on a supplemental basis, will be confidential and exempt from disclosure under the Freedom of Information Act pursuant to 12 CFR 4.32(b) as a record created or obtained by the OCC in connection with the OCC's performance of its responsibilities, such as a record concerning supervision, licensing, regulations, and examination, of a national bank, a Federal savings association, a bank holding company, a savings and loan holding company, or an affiliate. The report is the property of the OCC and unauthorized disclosure of the report is generally prohibited pursuant to 12 CFR 4.37.
In accordance with section 3512 of the Paperwork Reduction Act (“PRA”) of 1995 (44 U.S.C. 3501-3521), the OCC may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (“OMB”) control number. The information collection requirements contained in this final rule were submitted by the OCC to OMB for review and approval in connection with the proposed rule under section 3506 of the PRA and § 1320.11 of OMB's implementing regulations (5 CFR part 1320 et seq.).
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (“RFA”), generally requires that, in connection with a notice of proposed rulemaking, an agency prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of a proposed rule on small entities.[17] The Small Business Administration has defined “small entities” for banking purposes to include a bank or savings association with $175 million or less in assets.[18]
Section 722 of the Gramm-Leach-Bliley Act [19] requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The OCC invited comment on how to make the proposed rule easier to understand. The OCC received one public comment advocating the use of plain language and has made an effort to address this comment in the final rule.
Authority: 12 U.S.C. 93a; 12 U.S.C. 1463(a)(2); 12 U.S.C. 5365(i)(2); 12 U.S.C. 5412(b)(2)(B).
(b) First stress test for covered institutions subject to stress testing requirements as of October 9, 2012. (1) A national bank or Federal savings association that is a $10 to $50 billion covered institution, as defined in § 46.2 of this part, as of October 9, 2012 must conduct its first stress test under this part using financial statement data as of September 30, 2013, and report the results of its stress test on or before March 31, 2014.
(2) A national bank or Federal savings association that is an over $50 billion covered institution, as defined in § 46.2 of this part, as of October 9, 2012 must conduct its first stress test under this part using financial statement data as of September 30, 2012, and report the results of its stress test on or before January 5, 2013.
(c) Covered institutions that become subject to stress testing requirements after October 9, 2012. A national bank or Federal savings association that becomes a covered institution, as defined in § 46.2 of this part, after October 9, 2012 shall conduct its first annual stress test under this part beginning in the next calendar year after the date the national bank or Federal savings association becomes a covered institution.
(d) Ceasing to be a covered institution or changing categories. (1) A covered institution shall remain subject to the stress test requirements based on its applicable category, as defined in § 46.2 of this part, unless and until total consolidated assets of the covered institution falls below the relevant size threshold for each of four consecutive quarters as reported by the covered institution's most recent Call Reports. The calculation shall be effective on the “as of” date of the fourth consecutive Call Report.
(2) Notwithstanding paragraph (d)(1) of this section, a national bank or Federal savings association that migrates from a $10 to $50 billion covered institution to an over $50 billion covered institution shall be subject to the stress test requirements applicable to an over $50 billion covered institution immediately as of the date the national bank or Federal savings association satisfies the size threshold for an over $50 billion covered institution, as defined in § 46.2 of this part.
(a) Generally. The OCC may require a national bank or Federal savings association not otherwise subject to this part to comply with the stress test requirements of this part. With respect to any national bank or Federal savings association subject to the stress test requirements of this part pursuant to § 46.3(a), the OCC may modify or delay some or all of the requirements of this part which include:
(c) Confidentiality of Reports. As provided by § 4.32(b) of this title, the report required under this section is non-public OCC information because it is deemed to be a record created or obtained by the OCC in connection with the OCC's performance of its responsibilities, such as a record concerning supervision, licensing, regulations, and examination, of a national bank, a Federal savings association, a bank holding company, a savings and loan holding company, or an affiliate. The report is the property of the OCC and unauthorized disclosure of the report is generally prohibited pursuant to § 4.37 of this part.
(3) A $10 to $50 billion covered institution that is subject to its first annual stress test pursuant to § 46.3(b)(1) of this part must make its initial public disclosure in the period starting June 15 and ending June 30 of 2015 by disclosing the results of a stress test conducted in 2014, using financial statement data as of September 30, 2014.