Source: https://www.federalregister.gov/documents/2020/03/24/2020-05476/stress-testing-of-regulated-entities
Timestamp: 2020-04-09 18:35:54
Document Index: 7357376

Matched Legal Cases: ['art 1238', 'art 1238', '§\u20091238', '§\u20091238', '§\u20091238', '§\u20091238', '§\u20091238', 'art 1202', '§\u20091238', '§\u20091238']

A Rule by the Federal Housing Finance Agency on 03/24/2020
This rule is effective: March 24, 2020.
16528-16531 (4 pages)
https://www.federalregister.gov/d/2020-05476 https://www.federalregister.gov/d/2020-05476
On December 16, 2019, FHFA published in the Federal Register proposed amendments to the stress testing requirements for the regulated entities. The comment period closed on January 15, 2020. FHFA received one comment which stated that the threshold of $250 billion in total consolidated assets was too high and lowering the threshold to $100 billion in total consolidated assets would be more appropriate. EGRRCPA set the threshold at $250 billion in total consolidated assets and the proposed rule reflects this statutory requirement. The Enterprises will continue to be covered by the rule at its new threshold, however, the Banks will not. After several years of assessing the Banks' stress tests, FHFA believes that its other supervision tools are sufficient for the agency's purposes, and that the additional burden on the Banks of conducting the annual stress tests is not necessary. FHFA retains under its general supervisory powers the discretion to require stress testing by the Banks if FHFA determines that it would be useful. Therefore, FHFA is adopting as its final rule the same rule proposed on December 16, 2019, without any change.
FHFA is adopting the proposed revisions to FHFA's rule without change as follows: The rule discontinues the Dodd-Frank Act stress testing of the Banks; prescribes the frequency of stress testing; and reduces the number of scenarios mandated for Enterprise Dodd-Frank Act stress testing. These revisions are described in more detail below.
As described above, section 401 of EGRRCPA amends section 165 of the Dodd-Frank Act by raising the minimum threshold for financial companies required to conduct stress tests from $10 billion to $250 billion. As there are no Banks with total consolidated assets of over $250 billion, the Banks will no longer be subject to the stress testing requirements of this rule. As the total consolidated assets for each Enterprise exceed the $250 billion threshold, the Enterprises remain subject to stress testing under this rule.Start Printed Page 16529
Section 401 of EGRRCPA also revised the requirement under section 165 of the Dodd-Frank Act for financial companies to conduct stress tests, changing the required frequency from “annual” to “periodic.” The term “periodic” is not defined in EGRRCPA. Because of the Enterprises' total consolidated asset amounts, their function in the mortgage market, size of their retained portfolios, and their share of the mortgage securitization market, FHFA will continue to require the Enterprises to conduct stress tests on an annual basis. This is consistent with FHFA's regulatory mission to ensure each of the regulated entities “operates in a safe and sound manner.” [6]
As discussed above, section 401 of EGRRCPA amends section 165(i) of the Dodd-Frank Act to no longer require the FRB to include an “adverse” stress-testing scenario, reducing the number of stress test scenarios from three to two. The “baseline” scenario is a set of conditions that affect the U.S. economy or the financial condition of the regulated entities, and that reflect the consensus views of the economic and financial outlook, and the “severely adverse” scenario is a more severe set of conditions and the most stringent of the former three scenarios. Although the “adverse” scenario has provided some additional value in limited circumstances, the “baseline” and “severely adverse” scenarios largely cover the full range of expected and stressful conditions. Therefore FHFA does not consider it necessary, for its supervisory purposes, to require the additional burden of analyzing an “adverse” scenario.
In accordance with section 165(i)(2)(C), FHFA has coordinated with both the FRB and the Federal Insurance Office (FIO). On November 1, 2019, the FRB published a final rule which revised “the minimum threshold for state member banks to conduct stress tests from $10 billion to $250 billion,” and revised “the frequency with which state member banks with assets greater than $250 billion would be required to conduct stress tests,” in addition to removing the adverse scenario from the list of required scenarios.[7] The FDIC adopted its final rule; [8] and the OCC its final rule.[9] Although FHFA's final rule is not identical to those of the FRB, the FDIC, and the OCC, it is consistent and comparable with them.
This final rule is effective immediately upon publication in the Federal Register. Section 553(d)(3) of the Administrative Procedure Act (APA) provides for a delayed effective date after publication of a rule, except “as otherwise provided by the agency for good cause found and published with the rule.” The changes to part 1238 primarily cover how FHFA will implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) stress testing requirements, as amended by section 401 of EGRRCPA. These amendments, applicable to large financial companies, became effective on November 24, 2019. Consistent with section 553(d)(3) and for the reasons discussed below, FHFA finds good cause exists to publish this final rule with an immediate effective date. Without this rule, the Enterprises and Federal Home Loan Banks will be required to conduct stress testing under the prior rule, incurring additional expense and burden which FHFA has determined is not necessary for purposes of safety and soundness. In addition, an immediate effective date permits FHFA to synchronize its supervisory efforts related to stress testing with the FRB and the FDIC. Accordingly, the FHFA finds good cause for the final rule to take effect immediately upon publication in the Federal Register.
In accordance with the Congressional Review Act (5 U.S.C. 801 et seq.), FHFA has determined that this final rule is not a major rule and has verified this determination with the Office of Information and Regulatory Affairs of the OMB.
For the reasons stated in the preamble, and under the authority of 12 U.S.C. 5365(i), FHFA amends part 1238 of Title 12 of the Code of Federal Regulations as follows:
Authority: 12 U.S.C. 1426, 4513, 4526, 4612; 5365(i).
2. Revise § 1238.1 to read as follows:
(2) This part establishes requirements that apply to each Enterprise's performance of periodic stress tests. The purpose of the periodic stress test is to provide the Enterprises, FHFA, and the FRB with additional, forward-looking information that will help them to assess capital adequacy at the Enterprises under various scenarios; to review the Enterprises' stress test results; and to increase public Start Printed Page 16530disclosure of the Enterprises' capital condition by requiring broad dissemination of the stress test scenarios and results.
3. Revise § 1238.2 to read as follows:
4. Revise § 1238.3 to read as follows:
5. Revise § 1238.4 to read as follows:
(2) Capital levels and capital ratios, including regulatory capital and net worth, and any other capital ratios specified by FHFA.
(d) Controls and oversight of the stress testing processes. (1) The appropriate senior management of each Enterprise must ensure that the Enterprise establishes and maintains a system of controls, oversight, and documentation, including policies and procedures, designed to ensure that the stress testing processes used by the Enterprises are effective in meeting the requirements of this part. These policies and procedures must, at a minimum, describe the Enterprise's testing practices and methodologies, validation and use of stress test results, and processes for updating the Enterprise's stress testing practices consistent with relevant supervisory guidance;
6. Revise § 1238.5 to read as follows:
(c) Confidential treatment of information submitted. Reports submitted to FHFA under this part are FHFA property and records (as defined in 12 CFR part 1202). The reports are and include non-public information contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of, FHFA in connection with the performance of the agency's responsibilities regulating or supervising the Enterprises. Disclosure of any reports submitted to FHFA or the information contained in any such report is prohibited unless authorized by this part, legal obligation, or otherwise by the Director of FHFA.
7. Revise § 1238.6 to read as follows:
8. Revise § 1238.7 to read as follows:
(3) A general description of the methodologies employed to estimate losses, pre-provision net revenue, and changes in capital positions over the planning horizon;Start Printed Page 16531
(5) Aggregate losses, pre-provision net revenue, net income, net worth, pro forma capital levels and capital ratios (including regulatory and any other capital ratios specified by FHFA) over the planning horizon, under the scenario; and
6. 12 U.S.C. 4513(a)(1)(B)
7. 84 FR 59032 (Nov. 1, 2019).
[FR Doc. 2020-05476 Filed 3-23-20; 8:45 am]