[Federal Register Volume 77, Number 198 (Friday, October 12, 2012)]
[Rules and Regulations]
[Pages 62377-62396]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-24987]



[[Page 62377]]

Vol. 77

Friday,

No. 198

October 12, 2012

Part IV





Federal Reserve System





-----------------------------------------------------------------------





12 CFR Part 252





Company-Run Stress Test Requirements; Final Rules

Federal Register / Vol. 77 , No. 198 / Friday, October 12, 2012 / 
Rules and Regulations

[[Page 62378]]


-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

12 CFR Part 252

[Regulation YY; Docket No. 1438]
RIN 7100-AD-86


Supervisory and Company-Run Stress Test Requirements for Covered 
Companies

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act or Act) requires the Board to conduct annual stress 
tests of bank holding companies with total consolidated assets of $50 
billion or more and nonbank financial companies the Financial Stability 
Oversight Council (Council) designates for supervision by the Board 
(nonbank covered companies, and together, with bank holding companies 
with total consolidated assets of $50 billion or more, covered 
companies) and also requires the Board to issue regulations that 
require covered companies to conduct stress tests semi-annually. The 
Board is adopting this final rule to implement the stress test 
requirements for covered companies established in the Dodd-Frank Act. 
This final rule does not apply to any banking organization with total 
consolidated assets of less than $50 billion. Furthermore, 
implementation of the stress testing requirements for bank holding 
companies that did not participate in the Supervisory Capital 
Assessment Program is delayed until September 2013.

DATES: The rule is effective on November 15, 2012.

FOR FURTHER INFORMATION CONTACT: Tim Clark, Senior Associate Director, 
(202) 452-5264, Lisa Ryu, Assistant Director, (202) 263-4833, Constance 
Horsley, Manager, (202) 452-5239, or David Palmer, Senior Supervisory 
Financial Analyst, (202) 452-2904, Division of Banking Supervision and 
Regulation; Laurie Schaffer, Associate General Counsel, (202) 452-2272, 
Benjamin W. McDonough, Senior Counsel, (202) 452-2036, or Christine E. 
Graham, Senior Attorney, (202) 452-3005, Legal Division.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Overview of Comments
III. Description of Final Rule
    A. Scope of Application
    B. Effective Date
    C. Overview of Stress Test Requirements
    D. Annual Supervisory Stress Tests Conducted by the Board
    E. Annual and Mid-Cycle Stress Tests Conducted by the Covered 
Companies
IV. Administrative Law Matters
    A. Use of Plain Language
    B. Paperwork Reduction Act Analysis
    C. Regulatory Flexibility Act Analysis

I. Background

    The Board has long held the view that a banking organization, such 
as a bank holding company or insured depository institution, should 
operate with capital levels well above its minimum regulatory capital 
ratios and commensurate with its risk profile.\1\ A banking 
organization should also have internal processes for assessing its 
capital adequacy that reflect a full understanding of its risks and 
ensure that it holds capital commensurate with those risks.\2\ 
Moreover, a banking organization that is subject to the Board's 
advanced approaches risk-based capital requirements must satisfy 
specific requirements relating to their internal capital adequacy 
processes in order to use the advanced approaches to calculate its 
minimum risk-based capital requirements.\3\ Stress testing is one tool 
that helps both bank supervisors and a banking organization measure the 
sufficiency of capital available to support the banking organization's 
operations throughout periods of stress.\4\ The Board and the other 
federal banking agencies previously have highlighted the use of stress 
testing as a means to better understand the range of a banking 
organization's potential risk exposures.\5\
---------------------------------------------------------------------------

    \1\ See 12 CFR part 225, Appendix A; see also Supervision and 
Regulation Letter SR 99-18, Assessing Capital Adequacy in Relation 
to Risk at Large Banking Organizations and Others with Complex Risk 
Profiles (July 1, 1999), available at http://www.federalreserve.gov/boarddocs/srletters/1999/SR9918.HTM (hereinafter SR 99-18).
    \2\ See Supervision and Regulation Letter SR 09-4, Applying 
Supervisory Guidance and Regulations on the Payment of Dividends, 
Stock Redemptions, and Stock Repurchases at Bank Holding Companies 
(Mar. 27, 2009), available at http://www.federalreserve.gov/boarddocs/srletters/2009/SR0904.htm (hereinafter SR 09-4).
    \3\ See 12 CFR part 225, Appendix G, section 22(a); see also, 
Supervisory Guidance: Supervisory Review Process of Capital Adequacy 
(Pillar 2) Related to the Implementation of the Basel II Advanced 
Capital Framework, 73 FR 44620 (July 31, 2008).
    \4\ A full assessment of a company's capital adequacy must take 
into account a range of risk factors, including those that are 
specific to a particular industry or company.
    \5\ See, e.g., Supervisory Guidance on Stress Testing for 
Banking Organizations With More Than $10 Billion in Total 
Consolidated Assets, 77 FR 29458 (May 17, 2012); Supervision and 
Regulation Letter SR 10-6, Interagency Policy Statement on Funding 
and Liquidity Risk Management (March 17, 2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1006.htm; 
Supervision and Regulation Letter SR 10-1, Interagency Advisory on 
Interest Rate Risk (January 11, 2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1001.htm; SR 09-4, 
supra note 2; Supervision and Regulation Letter SR 07-1, Interagency 
Guidance on Concentrations in Commercial Real Estate (Jan. 4, 2007), 
available at http://www.federalreserve.gov/boarddocs/srletters/2007/SR0701.htm; Supervision and Regulation Letter SR 12-7, Supervisory 
Guidance on Stress Testing for Banking Organizations With More Than 
$10 Billion in Total Consolidated Assets (May 14, 2012), available 
at http://www.federalreserve.gov/bankinforeg/srletters/sr1207.htm; 
SR 99-18, supra note1; Supervisory Guidance: Supervisory Review 
Process of Capital Adequacy (Pillar 2) Related to the Implementation 
of the Basel II Advanced Capital Framework, 73 FR 44620 (July 31, 
2008); The Supervisory Capital Assessment Program: SCAP Overview of 
Results (May 7, 2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf; and Comprehensive 
Capital Analysis and Review: Objectives and Overview (Mar. 18, 
2011), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110318a1.pdf.
---------------------------------------------------------------------------

    In particular, as part of its effort to stabilize the U.S. 
financial system during the recent financial crisis, the Board, along 
with other federal financial regulatory agencies and the Federal 
Reserve system, conducted stress tests of large, complex bank holding 
companies through the Supervisory Capital Assessment Program (SCAP). 
The SCAP was a forward-looking exercise designed to estimate revenue, 
losses, and capital needs under an adverse economic and financial 
market scenario. By looking at the broad capital needs of the financial 
system and the specific needs of individual companies, these stress 
tests provided valuable information to market participants, reduced 
uncertainty about the financial condition of the participating bank 
holding companies under a scenario that was more adverse than that 
which was anticipated to occur at the time, and had an overall 
stabilizing effect.
    Building on the SCAP and other supervisory work coming out of the 
crisis, the Board initiated the annual Comprehensive Capital Analysis 
and Review (CCAR) in late 2010 to assess the capital adequacy and the 
internal capital planning processes of large, complex bank holding 
companies and to incorporate stress testing as part of the Board's 
regular supervisory program for assessing capital adequacy and capital 
planning practices at large bank holding companies. The CCAR represents 
a substantial strengthening of previous approaches to assessing capital 
adequacy and promotes thorough and robust processes at large banking 
organizations for measuring capital needs and for managing and 
allocating capital resources. The CCAR focuses on the risk measurement 
and management

[[Page 62379]]

practices supporting organizations' capital adequacy assessments, 
including their ability to deliver credible inputs to their loss 
estimation techniques, as well as the governance processes around 
capital planning practices. On November 22, 2011, the Board issued an 
amendment (capital plan rule) to its Regulation Y to require all U.S. 
bank holding companies with total consolidated assets of $50 billion or 
more to submit annual capital plans to the Board to allow the Board to 
assess whether they have robust, forward-looking capital planning 
processes and have sufficient capital to continue operations throughout 
times of economic and financial stress.\6\
---------------------------------------------------------------------------

    \6\ See Capital Plans, 76 FR 74631 (Dec. 1, 2011) (codified at 
12 CFR 225.8).
---------------------------------------------------------------------------

    In the wake of the financial crisis, Congress enacted the Dodd-
Frank Act, which requires the Board to implement enhanced prudential 
supervisory standards, including requirements for stress tests, for 
covered companies to mitigate the threat to financial stability posed 
by these institutions.\7\ Section 165(i)(1) of the Dodd-Frank Act 
requires the Board to conduct an annual stress test of each covered 
company to evaluate whether the covered company has sufficient capital, 
on a total consolidated basis, to absorb losses as a result of adverse 
economic conditions (supervisory stress tests). The Act requires that 
the supervisory stress test provide for at least three different sets 
of conditions--baseline, adverse, and severely adverse conditions--
under which the Board would conduct its evaluation. The Act also 
requires the Board to publish a summary of the supervisory stress test 
results.\8\
---------------------------------------------------------------------------

    \7\ See 12 U.S.C. 5365(a). As defined above, a ``covered 
company'' includes any bank holding company with total consolidated 
assets of $50 billion or more and each nonbank financial company 
that the Council has designated for supervision by the Board.
    \8\ See 12 U.S.C. 5365(i)(1).
---------------------------------------------------------------------------

    In addition, section 165(i)(2) of the Dodd-Frank Act requires the 
Board to issue regulations that require covered companies to conduct 
stress tests semi-annually and require financial companies with total 
consolidated assets of more than $10 billion that are not covered 
companies and for which the Board is the primary federal financial 
regulatory agency to conduct stress tests on an annual basis 
(collectively, company-run stress tests).\9\ The Act requires that the 
Board issue regulations that: (i) Define the term ``stress test''; (ii) 
establish methodologies for the conduct of the company-run stress tests 
that provide for at least three different sets of conditions, including 
baseline, adverse, and severely adverse conditions; (iii) establish the 
form and content of the report that companies subject to the regulation 
must submit to the Board; and (iv) require companies to publish a 
summary of the results of the required stress tests.\10\
---------------------------------------------------------------------------

    \9\ 12 U.S.C. 5365(i)(2). In this final rule, the Board is 
implementing the requirements for covered companies only. The 
requirements applicable to other banking organizations with total 
consolidated assets of more than $10 billion and for which the Board 
is the primary federal financial regulatory agency are contained in 
a concurrently issued final rule being published in this issue of 
the Federal Register.
    \10\ See 12 U.S.C. 5365(i)(2)(C).
---------------------------------------------------------------------------

    On January 5, 2012, the Board invited public comment on a notice of 
proposed rulemaking (proposal or NPR) that would implement the enhanced 
prudential standards required to be established under section 165 of 
the Dodd-Frank Act and the early remediation requirements established 
under Section 166 of the Act, including proposed rules regarding 
supervisory and company-run stress tests.\11\ Under the proposed rules, 
the Board would conduct an annual supervisory stress test of covered 
companies under three sets of scenarios, using data as of September 30 
of each year as reported by covered companies, and publish a summary of 
the results of the supervisory stress tests in early April of the 
following year. In addition, the proposed rule required each covered 
company to conduct two company-run stress tests each year: An 
``annual'' company-run stress test using data as of September 30 of 
each year and the three scenarios provided by the Board, and an 
additional company-run stress test using data as of March 31 of each 
year and three scenarios developed by the company. The proposed rule 
required each covered company to publish the summary of the results of 
its company-run stress tests within 90 days of submitting the results 
to the Board.
---------------------------------------------------------------------------

    \11\ Enhanced Prudential Standards and Early Remediation 
Requirements for Covered Companies, 77 FR 594 (Jan. 5, 2012).
---------------------------------------------------------------------------

    Together, the supervisory stress tests and the company-run stress 
tests are intended to provide supervisors with forward-looking 
information to help identify downside risks and the potential effect of 
adverse conditions on capital adequacy at covered companies. The stress 
tests will estimate the covered company's net income and other factors 
affecting capital and how each covered company's capital resources 
would be affected under the scenarios and will produce pro forma 
projections of capital levels and regulatory capital ratios in each 
quarter of the planning horizon, under each scenario. The publication 
of summary results from these stress tests will enhance public 
information about covered companies' financial condition and the 
ability of those companies to absorb losses as a result of adverse 
economic and financial conditions. The Board will use the results of 
the supervisory stress tests and company-run stress tests in its 
supervisory evaluation of a covered company's capital adequacy and 
capital planning practices. In addition, the stress tests will also 
provide a means to assess capital adequacy across companies more fully 
and support the Board's financial stability efforts.
    The Dodd-Frank Act mandates that the OCC and the FDIC adopt rules 
implementing stress testing requirements for the depository 
institutions that they supervise, and the OCC and FDIC invited public 
comment on proposed rules in January of 2012.\12\
---------------------------------------------------------------------------

    \12\ Annual Stress Test, 77 FR 3408 (Jan. 24, 2012) (OCC); 
Annual Stress Test, 77 FR 3166 (Jan. 17, 2012) (FDIC).
---------------------------------------------------------------------------

    The Board is finalizing the stress testing frameworks in two 
separate rules. First, the Board is issuing this final rule, which 
implements the supervisory and company-run stress testing requirements 
for covered companies (final rule).
    Second, the Board is concurrently issuing a final rule implementing 
annual company-run stress test requirements for bank holding companies, 
savings and loan holding companies, and state member banks with 
consolidated assets greater than $10 billion that are not otherwise 
covered by this rule.
    The Board is issuing this final rule implementing the stress 
testing requirements in advance of the other enhanced prudential 
standards and early remediation requirements in order to address the 
timing of when the stress testing requirements will apply to various 
banking organizations and to require large bank holding companies to 
publicly disclose the results of their company-run stress tests 
conducted in the fall of 2012.

II. Overview of Comments

    The Board received approximately 100 comments on its NPR on 
enhanced prudential standards and early remediation requirements. 
Approximately 40 of these comments pertained to the proposed stress 
testing requirements. Commenters ranged from individual banking 
organizations to trade and industry groups and public interest groups. 
In general, commenters

[[Page 62380]]

expressed support for stress testing as a valuable tool for identifying 
and managing both micro- and macro-prudential risk. However, several 
commenters recommended changes to, or clarification of, certain 
provisions of the proposed rule, including its timeline for 
implementation, reporting requirements, and disclosure requirements. 
Commenters also urged greater interagency coordination regarding stress 
tests and requested more information on the scenario design process and 
the models and methodologies that the Board intends to use in the 
supervisory stress tests.

A. Delayed Compliance Date

    Commenters suggested that covered companies that have not 
previously been subject to stress testing requirements need more time 
to develop systems and procedures to be able to conduct the stress 
tests and collect the information that the Board may require in 
connection with these tests. In response to these comments and to 
reduce burden on these institutions, the final rule provides that firms 
that have not previously participated in SCAP will begin conducting 
stress tests in the fall of 2013, and non-bank covered companies will 
begin conducting stress tests in the calendar year after the year in 
which the company first becomes subject to the Board's minimum 
regulatory capital requirements. Similarly, the rule requires any bank 
holding company that becomes a covered company after the effective date 
of this rule to comply with the requirements beginning in the fall of 
the calendar year that follows the year the company becomes a covered 
company, unless that time is extended by the Board in writing.\13\
---------------------------------------------------------------------------

    \13\ In extending a time period under the final rule, the Board 
will consider the activities, level of complexity, risk profile, 
scope of operations, and the regulatory capital of the covered 
company, and any other relevant factors.
---------------------------------------------------------------------------

B. Tailoring

    The proposed rule would have applied consistent annual company-run 
stress test requirements, including the compliance date and the 
disclosure requirements, to all banking organizations with total 
consolidated assets of more than $10 billion and nonbank financial 
companies.\14\ The Board sought public comment on whether the stress 
testing requirements should be tailored, particularly for financial 
companies that are not large bank holding companies.
---------------------------------------------------------------------------

    \14\ Under the proposal, savings and loan holding companies 
would not have been subject to the proposed requirements, including 
timing of required submissions to the Board, until savings and loan 
holding companies were subject to minimum risk-based capital and 
leverage requirements.
---------------------------------------------------------------------------

    Several commenters expressed concern that the NPR would have 
applied stress testing requirements previously applicable only to large 
bank holding companies, such as those conducted under the CCAR, to 
smaller, less complex banking organizations with smaller systemic 
footprints and to nonbank financial companies. Furthermore, commenters 
indicated that there are substantial differences between bank holding 
companies and nonbank financial companies, and that the Board should 
tailor the proposed prudential standards to account for these 
differences.
    The Board recognizes that the population of covered companies is 
diverse and that certain covered companies may pose more material risk 
to U.S. financial stability than others. Furthermore, section 165 of 
the Dodd-Frank Act directs the Board to implement enhanced prudential 
standards that increase in stringency with the systemic footprint of 
each company.\15\ As a result, the Board expects to use a tailored 
approach in implementing the stress test requirements for covered 
companies, using their systemic footprint as the basis for tailoring. 
For example, the Board is delaying the compliance date for covered 
companies that did not participate in SCAP. In addition, the Board 
expects to require a subset of large, complex covered companies to 
include additional components in their adverse and severely adverse 
scenarios or to apply additional scenarios beyond the macroeconomic 
scenarios applied to all covered companies.
---------------------------------------------------------------------------

    \15\ See 12 U.S.C. 5365(a)(1).
---------------------------------------------------------------------------

    With respect to nonbank financial companies, several commenters 
requested that the Board either further tailor the requirements for 
nonbank covered companies in the final rule or issue a separate rule 
for these companies. For example, some commenters requested that the 
Board develop standards that were ``insurance-centric'' rather than 
``bank-centric,'' noting that stress test scenarios relevant for bank 
holding companies would ignore salient risks to insurers, such as the 
possibility of a natural disaster.\16\ The Board may, by order or 
regulation, tailor the application of the enhanced standards to nonbank 
covered companies on an individual basis or by category, as 
appropriate. As noted in the proposal, the Board expects to take into 
account differences among bank holding companies and nonbank covered 
companies supervised by the Board when applying enhanced supervisory 
standards, including stress testing requirements. Following designation 
by the Council, the Board will assess the business model, capital 
structure, and risk profile of a designated nonbank financial company 
to determine how the enhanced prudential standards, including the 
stress test requirements in this final rule, and the early remediation 
requirements should apply.
---------------------------------------------------------------------------

    \16\ A number of commenters on the NPR expressed concerns about 
the application of the proposed standards to nonbank covered 
companies. Several of these commenters raised a concern that the NPR 
does not afford nonbank financial companies a meaningful opportunity 
to comment on how the Board should tailor the standards to nonbank 
financial companies. Commenters indicated that there are substantial 
differences between bank holding companies and nonbank financial 
companies, and that the Board should tailor the proposed prudential 
standards to account for these differences on a case-by-case basis 
following the rulemaking process.
---------------------------------------------------------------------------

    Finally, the Board plans to issue supervisory guidance to provide 
more detail describing supervisory expectations for company-run stress 
tests. This guidance will be tailored based on the size and complexity 
of a covered company.

C. Coordination

    Many commenters emphasized the need for the federal banking 
agencies to coordinate stress testing requirements for parent holding 
companies and depository institution subsidiaries and more generally in 
regard to stress testing frameworks. Commenters recommended that the 
Board, the Office of the Comptroller of the Currency (OCC), and the 
Federal Deposit Insurance Corporation (FDIC) coordinate in implementing 
the Dodd-Frank Act stress testing requirements in order to minimize 
regulatory burden. Commenters asked that the agencies eliminate 
duplicative requirements and use an interagency forum, like the Federal 
Financial Institutions Examination Council, to develop common forms, 
policies, procedures, assumptions, methodologies, and application of 
results.
    The Board has coordinated closely with the FDIC and the OCC to help 
to ensure that the company-run stress testing regulations are 
consistent and comparable across depository institutions and depository 
institution holding companies and to address any burden that may be 
associated with having multiple entities within one organizational 
structure having to meet stress testing requirements. The Board 
anticipates that it will continue to consult with the FDIC and OCC in 
the

[[Page 62381]]

implementation of the final rule, and in particular, in the development 
of stress scenarios. The Board plans to develop scenarios each year in 
close consultation with the FDIC and the OCC, so that, to the greatest 
extent possible, a common set of scenarios can be used for the 
supervisory stress tests and the annual company-run stress tests across 
various banking entities within the same organizational structure.

D. Consolidated Publication and Group-Wide Systems and Models

    In addition to requesting better coordination, commenters inquired 
as to whether a company-run stress test conducted by a parent holding 
company would satisfy the stress testing requirements applicable to 
that holding company's subsidiary depository institutions. Commenters 
recommended that in order to reduce burden the Board develop and 
require the use of a single set of scenarios for a bank holding company 
and any depository institution subsidiary of the bank holding company, 
if the Board imposed separate stress testing requirements on both the 
bank holding company and bank.
    In order to reduce burden on banking organizations, the final rule 
provides that a subsidiary depository institution will disclose its 
stress testing results as part of the results disclosed by its bank 
holding company parent. Disclosure by the bank holding company of its 
stress test results and those of any subsidiary state member bank will 
generally satisfy any disclosure requirements applicable to the state 
member bank subsidiary.
    Moreover, a state member bank that is controlled by a bank holding 
company may rely on the systems and models of its parent bank holding 
company if its systems and models fully capture the state member bank's 
risks. For example, under those circumstances, the bank holding company 
and state member bank may use the same data collection processes and 
methods and models for projecting and calculating potential losses, 
pre-provision net revenues, provision for loan and lease losses, and 
pro forma capital positions over the stress testing planning horizon.

III. Description of the Final Rule

A. Scope of Application

    This final rule applies to any bank holding company (other than a 
foreign banking organization) that has $50 billion or more in average 
total consolidated assets \17\ and to any nonbank financial company 
that the Council has determined under section 113 of the Dodd-Frank Act 
must be supervised by the Board and for which such determination is in 
effect.
---------------------------------------------------------------------------

    \17\ The final rule applies only to U.S.-domiciled bank holding 
companies that are covered companies, including, for example, the 
U.S.-domiciled bank holding company subsidiary of a foreign banking 
organization, but does not apply to any foreign banking 
organization.
---------------------------------------------------------------------------

    Average total consolidated assets for bank holding companies is 
based on the average of the total consolidated assets as reported on 
the bank holding company's four most recent Consolidated Financial 
Statement for Bank Holding Companies (FR Y-9C). If the bank holding 
company has not filed the FR Y-9C for each of the four most recent 
consecutive quarters, average total consolidated assets will be based 
on the average of the company's total consolidated assets, as reported 
on the company's FR Y-9C, for the most recent quarter or consecutive 
quarters. In either case, average total consolidated assets are 
measured on the as-of date of the relevant regulatory report.
    Once the average total consolidated assets of a bank holding 
company exceed $50 billion, the company will remain subject to the 
final rule's requirements unless and until the total consolidated 
assets of the company are less than $50 billion, as reported on four FR 
Y-9C reports consecutively filed. Average total consolidated assets are 
measured on the as-of date of the FR Y-9C.
    The final rule does not apply to foreign banking organizations. The 
Board expects to issue for public comment a separate rulemaking on the 
application of enhanced prudential standards and early remediation 
requirements established under the Dodd-Frank Act, including enhanced 
capital and stress testing requirements, to foreign banking 
organizations at a later date. A U.S.-domiciled bank holding company 
subsidiary of a foreign banking organization that has total 
consolidated assets of $50 billion or more is subject to the 
requirements of this final rule. \18\
---------------------------------------------------------------------------

    \18\ A U.S.-domiciled bank holding company subsidiary of a 
foreign banking organization that is currently relying on 
Supervision and Regulation Letter SR 01-01 issued by the Board (as 
in effect on May 19, 2010) is not required to comply with the final 
rule's requirements until July 21, 2015.
---------------------------------------------------------------------------

B. Effective Date

    Under the proposal, the stress testing requirements would have 
become effective upon adoption of a final rule. A bank holding company 
that was a covered company as of the effective date of the rule would 
have been required to immediately comply with its requirements. A bank 
holding company became a covered company after adoption of the rule but 
more than 90 days before September 30 of a given year would have been 
subject to the supervisory and company-run stress test requirements 
starting that year. With respect to the mid-cycle company-run stress 
test, bank holding companies that met the proposal's asset threshold 
more than 90 days before March 31 of a given year would need to satisfy 
the requirements of the mid-cycle stress tests that year (e.g., 
reporting and publication requirements). Nonbank financial companies 
designated for supervision by the Council more than 180 days before 
September 30 of a given year would have been required to comply with 
the stress test requirements starting that year.
    Commenters indicated that the Board should give companies that have 
not participated in CCAR additional time before subjecting such 
companies to stress test requirements. Commenters argued that delaying 
implementation for these companies is necessary to allow sufficient 
time to develop the systems and procedures to collect the information 
requested by the Board in connection with these tests. In response to 
these comments, the Board is delaying the compliance date of stress 
test requirements under the final rule for certain bank holding 
companies that have not previously participated in stress testing 
through SCAP or CCAR. Under the final rule, a bank holding company that 
participated in SCAP, or successor to such bank holding company, is 
required to comply with the supervisory and company-run stress test 
requirements beginning on November 15, 2012, unless that time is 
extended by the Board in writing.\19\ All other bank holding companies 
that are covered companies will be required to comply with the 
supervisory and company-run stress test requirements beginning in the 
fall of 2013, unless that time is extended by the Board in writing.\20\
---------------------------------------------------------------------------

    \19\ The bank holding companies that participated in SCAP were: 
American Express Company, Bank of America Corporation, BB&T 
Corporation, Bank of New York Mellon Corporation, Capital One 
Financial Corp., Citigroup, Inc., Fifth Third Bancorp, GMAC LLC (now 
Ally Financial Inc.), Goldman Sachs Group Inc., JPMorgan Chase & 
Co., KeyCorp, MetLife Inc., Morgan Stanley, PNC Financial Services 
Group, Regions Financial Corporation, State Street Corp., SunTrust 
Banks, Inc., US Bancorp, and Wells Fargo & Company.
    \20\ Covered companies are required to submit FR Y-14 data as of 
September 30, 2012. In addition, all bank holding companies with 
total consolidated assets of $50 billion or more remain subject to 
the requirements of the Board's capital plan rule (12 CFR 225.8).
---------------------------------------------------------------------------

    Commenters similarly expressed concern that bank holding companies 
and nonbank financial companies that

[[Page 62382]]

become covered companies after the effective date of the final rule 
would not have sufficient time to build the systems, contract with 
outside vendors, recruit experienced personnel, and develop stress 
testing models that are unique to their organization under the proposed 
compliance date. In addition, the Federal Advisory Council recommended 
that the Board phase in disclosure requirements to minimize risk, build 
precedent, and allow banks and supervisors to gain experience, 
expertise, and mutual understanding of stress testing models.
    In response to these comments, the Board extended the compliance 
date applicable to bank holding companies that become covered companies 
after the effective date of the rule. Under the final rule, such a bank 
holding company will be required to conduct its first stress tests 
beginning in the fall of the calendar year after the company becomes a 
covered company, unless that time is extended by the Board in writing.
    The Board also is extending the compliance date applicable to 
nonbank covered companies to provide that all nonbank covered companies 
will be required to conduct their first stress test in the calendar 
year after the year in which the nonbank covered company becomes 
subject to the Board's minimum regulatory capital requirements, unless 
the Board accelerates or extends the compliance date. The extended 
timeline for nonbank financial companies supervised by the Board will 
allow those companies and the Board to build and adapt stress testing 
systems and processes for application to specific nonbank businesses.

C. Overview of Stress Test Requirements Applicable to Both Supervisory 
and Company-Run Stress Tests

    The Board designed the final rule in a manner to integrate the 
supervisory stress tests and company-run stress tests with the Board's 
capital plan rule in order to achieve a streamlined regime that 
minimizes regulatory burden. The following discussion describes three 
of these integrated aspects: Timing, reporting, and scenario design.
1. Timing of the Stress Testing Requirements
    Under the proposal, the Board would have required an as-of date of 
September 30 of information to be submitted to the Board, provided 
covered companies with scenarios for the supervisory and annual 
company-run stress tests by mid-November of each year, required the 
filing of regulatory reports by January 5, and provided for publication 
of summary results of the annual company-run stress test and 
supervisory stress tests in early April. For the mid-cycle company-run 
stress test, the Board proposed to require regulatory reports by July 5 
and publication of summary results by early October.
    Several commenters provided suggestions on the proposed timeline 
for the supervisory and company-run stress tests. Comments included 
those relating to the as-of date for data to be submitted by covered 
companies, the date for submitting results to the Board, and the dates 
when public disclosures of stress test results are to be made. For 
instance, some commenters suggested that the Board should use data 
collected at as-of dates other than September 30, such as June 30 or 
December 31, and make corresponding changes to the timing of public 
disclosure in order to reduce burden on companies during the year-end 
period. One commenter suggested having a floating submission date, 
allowing organizations to submit their results at the point in the year 
when it is most convenient. Some commenters also requested that the 
Board release the scenarios earlier to provide banking organizations 
more time to prepare the required reports for the stress tests.
    In order to integrate the supervisory and company-run stress tests 
with the capital plan rule, the final rule generally maintains the 
timing for the supervisory and company-run stress tests set forth in 
the proposal. The capital plan rule requires bank holding companies to 
submit their capital plan to the Board by January 5 using a September 
30 as-of date in order to provide the Board sufficient time to review 
the bank holding company's capital plan and to provide its assessment 
to the bank holding company within the first quarter, minimizing the 
potential to disrupt the bank holding company's ability to make capital 
distributions in subsequent quarters of that year. Accordingly, the 
final rule maintains a September 30 as-of date and the January 5th date 
for submission of the report to the Board in order to align the 
requirements and reduce any undue burden for covered companies.\21\ 
Correspondingly, the final rule maintains the March 31 as-of date for 
the mid-cycle company-run stress tests.
---------------------------------------------------------------------------

    \21\ As described below in section III.E.1 of this SUPPLEMENTARY 
INFORMATION, the Board may require a covered company with 
significant trading activity, as determined by the Board and 
specified in the Capital Assessments and Stress Testing information 
collection (FR Y-14), to include a trading and counterparty scenario 
in its stress test. The data used in this scenario will be as of a 
date between October 1 and December 1 of that calendar year selected 
by the Board, and the Board will communicate the as-of date and a 
description of the component to the company no later than December 1 
of the calendar year.
---------------------------------------------------------------------------

    Commenters requested that the Board release the scenarios earlier 
in the annual stress test cycle to provide covered companies more time 
to prepare the reports for supervisory stress tests and company-run 
stress tests. Under the final rule, the Board will provide descriptions 
of the baseline, adverse, and severely adverse scenarios generally 
applicable to covered companies no later than November 15 of each year, 
and provide any additional components or scenarios by December 1. The 
Board believes that providing scenarios earlier than November could 
result in the scenarios being stale, particularly in a rapidly changing 
economic environment, and that it is important to incorporate economic 
or financial market data that are as current as possible while 
providing sufficient time for covered companies to incorporate the 
scenarios in their annual company-run stress tests.
    Commenters also noted that the proposed public disclosure deadlines 
(early April for annual supervisory and company-run stress tests and 
early October for mid-cycle company-run stress tests) would interfere 
with so-called ``quiet periods'' that some publicly-traded banking 
organizations enforce in the lead up to earnings announcements. These 
quiet periods are designed to limit communications that could 
disseminate proprietary company information prior to earnings 
announcements.
    In light of these comments, the Board adjusted the disclosure date 
to avoid interfering with firms' quiet periods. Under the final rule, 
covered companies are required to disclose the results of their annual 
company-run stress tests between March 15 and March 31 and to disclose 
the results of their mid-cycle company-run stress tests between 
September 15 and September 30.
    Table 1 describes the annual supervisory and company-run stress 
test cycles, including the anticipated general timeframes for each step 
in 2013.

[[Page 62383]]

[GRAPHIC] [TIFF OMITTED] TR12OC12.009

2. Reporting
    To the greatest extent possible, the final rule's reporting 
framework has been designed to minimize burden on the covered company 
and to avoid duplication, particularly in light of other reporting 
requirements that may be imposed by the Board. Accordingly, the final 
rule will require each covered company to file a single set of 
regulatory reports with the Board by January 5 that contains 
information that will support the Board's supervisory stress tests as 
well as report the results of the company-run stress tests.\23\ In a 
separate Federal Register notice, the Board has invited comment on 
these reports, the Capital Assessments and Stress Testing information 
collection (FR Y-14Q, FR Y-14M, and FR Y-14A, together, FR Y-14). For 
purposes of the mid-cycle company-run stress test, a covered company 
will file a regulatory report with the Board by July 5. The Board 
expects that this report will be identical to or modeled on the FR Y-
14A, and will seek public comment on it.
---------------------------------------------------------------------------

    \22\ Covered companies must disclose their results in the period 
between March 15 and March 31.
    \23\ The FR Y-14 contains information that the Board has 
determined is necessary in order for the Board to derive the 
relevant pro forma estimates of the covered company over the 
planning horizon for purposes of both this rule and the Board's 
capital plan rule. The Board expects to apply the FR Y-14 to a 
nonbank financial company supervised by the Board upon such a 
company's designation.
---------------------------------------------------------------------------

    In addition, the Board may require a covered company to submit any 
other information on a consolidated basis that the Board deems 
necessary in order to ensure that the Board has sufficient information 
to conduct supervisory stress test; and project a company's losses, 
pre-provision net revenue, provision for loan and lease losses, pro 
forma capital levels, regulatory capital ratios, and tier 1 common 
ratio under the scenarios it provides. In addition, the Board may 
obtain supplemental information from covered companies, as needed, 
through the supervisory process.
    The confidentiality of any information submitted to the Board for 
the supervisory and company-run stress tests will be determined in 
accordance with the Board's rules regarding availability of 
information.\24\
---------------------------------------------------------------------------

    \24\ See generally 12 CFR part 261; see also 5 U.S.C. 552(b).
---------------------------------------------------------------------------

3. Scenarios
    The proposal provided that the Board would publish a minimum of 
three different sets of economic and financial conditions, including 
baseline, adverse, and severely adverse scenarios, under which the 
Board would conduct its annual analyses and companies would conduct 
their annual company-run stress tests. The Board would update, make 
additions to, or otherwise revise

[[Page 62384]]

these scenarios as appropriate, and would publish any such changes to 
the scenarios in advance of conducting each year's stress test.
    Commenters suggested that significant changes in scenarios from 
year to year could cause a banking organization's stress testing 
results to dramatically change. To ameliorate this volatility, 
commenters suggest that the federal banking agencies have a uniform 
approach for identifying stress scenarios or establish a ``quantitative 
severity limit'' in the final rule to ensure that scenarios do not 
drastically change from year to year. Commenters pointed out that 
consistency in annual scenario development will make comparability of 
stress test results between institutions and across time periods more 
accurate, increase market confidence in the results of stress tests, 
and make for more dependable capital planning by banking organizations. 
Commenters also requested the opportunity to provide input on the 
scenarios.
    The Board believes that it is important to have a consistent and 
transparent framework to support scenario design. To further this goal, 
the final rule clarifies the definition of ``scenarios'' and includes 
definitions of baseline, adverse, and severely adverse scenarios. 
Scenarios are defined as those sets of conditions that affect the U.S. 
economy or the financial condition of a covered company that the Board, 
or with respect to the mid-cycle stress test, the covered company, 
annually determines are appropriate for use in the company-run stress 
tests, including, but not limited to, baseline, adverse, and severely 
adverse scenarios.
    The baseline scenario is defined as a set of conditions that affect 
the U.S. economy or the financial condition of a covered company and 
that reflect the consensus views of the economic and financial outlook. 
The adverse scenario is defined as a set of conditions that affect the 
U.S. economy or the financial condition of a covered company that are 
more adverse than those associated with the baseline scenario and may 
include trading or other additional components. The severely adverse 
scenario is defined as a set of conditions that affect the U.S. economy 
or the financial condition of a covered company and that overall are 
more severe than those associated with the adverse scenario and may 
include trading or other additional components.
    In general, the baseline scenario will reflect the consensus views 
of the macroeconomic outlook expressed by professional forecasters, 
government agencies, and other public-sector organizations as of the 
beginning of the annual stress-test cycle. The Board expects that the 
severely adverse scenario will, at a minimum, include the paths of 
economic variables that are generally consistent with the paths 
observed during severe post-war U.S. recessions. Each year the Board 
expects to take into account of salient risks that affect the U.S. 
economy or the financial condition of a covered company that may not be 
observed in a typical severe recession. The Board expects that the 
adverse scenario will, at a minimum, include the paths of economic 
variables that are generally consistent with mild to moderate 
recessions. The Board may vary the approach it uses for the adverse 
scenario each year so that the results of the scenario provide the most 
value to supervisors, given the current conditions of the economy and 
the banking industry. Some of the approaches the Board may consider 
using include, but are not limited to, a less severe version of the 
severely adverse scenario or specifically capturing, in the adverse 
scenario, risks that the Board believes should be understood better or 
should be monitored.
    The scenarios will consist of a set of conditions that affect the 
U.S. economy or the financial condition of a covered company over the 
stress test planning horizon. These conditions will include projections 
for a range of macroeconomic and financial indicators, such as real 
Gross Domestic Product (GDP), the unemployment rate, equity and 
property prices, and various other key financial variables, and will be 
updated each year to reflect changes in the outlook for economic and 
financial conditions. The paths of these economic variables could 
reflect risks to the economic and financial outlook that are especially 
salient but were not prevalent in recessions of the past.
    Depending on the systemic footprint and scope of operations and 
activities of a company, the Board may use, and require that company to 
use, additional components in the adverse and severely adverse 
scenarios or additional or more complex scenarios that are designed to 
capture salient risks to specific lines of business. For example, the 
Board recognizes that certain trading positions and trading-related 
exposures are highly sensitive to adverse market events, potentially 
leading to large short-term volatility in covered companies' earnings. 
To address this risk, the Board may require covered companies with 
significant trading activities to include market price and rate 
``shocks'' in their adverse and severely adverse scenarios as specified 
by the Board, that are consistent with historical or other adverse 
market events. In addition, the scenarios, in some cases, may also 
include stress factors that may not be directly correlated to 
macroeconomic or financial assumptions but nevertheless can materially 
affect covered companies' risks, such as factors that affect 
operational risks. The process by which the Board may require a covered 
company to include additional components in its adverse and severely 
adverse scenarios or to use additional scenarios is described under 
section III.E.2 of this SUPPLEMENTARY INFORMATION. The Board plans to 
publish for comment a policy statement that describes its framework for 
developing scenarios.
    Some commenters suggested that the Board adopt a tailored approach 
to scenarios to better capture idiosyncratic characteristics of each 
company. For example, commenters representing the insurance industry 
suggested that any stress testing regime applicable to insurance 
companies incorporate shocks relating to the exogenous factors that 
actually impact a particular company, such as a shock to the insurance 
company's insurance policy portfolio arising from a natural disaster, 
and de-emphasize shocks arising from traditional banking activities.
    In the Board's view, a generally uniform set of scenarios is 
necessary to provide a basis for comparison across companies. However, 
the Board expects that each company's stress testing practices will be 
tailored to its business model and lines of business, and that the 
company may not use all of the variables provided in the scenario, if 
those variables are not appropriate to the firm's line of business, or 
may add additional variables, as appropriate.\25\ In addition, the 
Board expects banking organizations to consider other scenarios that 
are more idiosyncratic to their operations and associated risks as part 
of their ongoing internal analyses of capital adequacy and include 
company-specific vulnerabilities in their scenarios when complying with 
the Board's requirements for mid-cycle company-run stress test as 
described in section 252.145.
---------------------------------------------------------------------------

    \25\ The Board expects banking organizations will ensure that 
the paths of such additional variables are consistent with the 
scenarios the Board provided. For example, the path of any local 
economic variable should be consistent with the path of a national 
economic variable that the Board provides.
---------------------------------------------------------------------------

D. Annual Supervisory Stress Tests Conducted by the Board

    The following discussion describes the Board's methodologies for 
the conduct of the stress tests, the process the Board intends to use 
to

[[Page 62385]]

communicate the results to the company, the post-assessment actions 
that a company is expected to take in response to the supervisory 
stress tests, and the Board's publication of the stress test results.
1. Methodology for Estimating Losses and Revenues
    In the NPR, the Board proposed that it would use the analytical 
techniques it determines to be appropriate to identify, measure, and 
monitor risks of covered companies that may affect the financial 
stability of the United States. The Board also outlined in the proposal 
the general framework it would use to analyze the projected losses, 
pre-provision net revenue, provision for loan and lease losses, and pro 
forma, post-stress capital levels and regulatory capital ratios in 
conducting a stress test for covered companies.
    The Board received numerous comments requesting greater clarity 
with respect to the application of the supervisory stress test models. 
For example, commenters requested that the Board increase the 
transparency of the Board's analysis, modeling techniques, and 
assumptions used to analyze the banks by stress tests in the final 
rule. Commenters further recommended that these models and applications 
should be subject to a final public consultative process prior to 
implementation and that the Board should provide a detailed description 
of models in the form of consultative ``white papers.''
    The Board is currently considering how to provide more transparency 
with respect to its models while not reducing incentives on the part of 
covered companies to develop better internal stress test models that 
factor in their idiosyncratic risks and to consider the results of such 
models in their capital planning process. At a minimum, the Board plans 
to publish an overview of its stress testing methodologies each year. 
In addition, the Board expects to communicate the extent and timing of 
disclosure of information about supervisory models at a later date.
    The Board has established an independent, internal model validation 
group to review supervisory models and their implementation, which is 
intended to foster continuing improvements in supervisory modeling 
practices. In addition, the Board formed the Model Validation Council 
earlier this year, composed of independent, external experts who 
provide input to the Board's internal model validation process used to 
assess the effectiveness of the models used in the supervisory stress 
tests.\26\ The Model Validation Council is intended to improve the 
quality of the Board's model validation process, and, thereby, 
strengthen confidence in the Board's stress tests.
---------------------------------------------------------------------------

    \26\ The Board published a press release on the Model Validation 
Council on April 20, 2012. See Press Release, Board of Governors of 
the Federal Reserve System, Federal Reserve Board announces the 
formation of the Model Validation Council (Apr. 20, 2012) available 
at http://www.federalreserve.gov/newsevents/press/bcreg/20120420a.htm.
---------------------------------------------------------------------------

    As described in the proposal, the anticipated framework to be used 
in supervisory stress tests has a number of elements. The Board will 
calculate each covered company's projected losses, pre-provision net 
revenue, provision for loan and lease losses and other factors 
affecting capital using a series of models and estimation techniques 
that relate the economic and financial variables in the baseline, 
adverse, and severely adverse scenarios to the company's losses and 
revenues. The Board has developed a series of models to estimate losses 
on various types of loans and securities held by the covered company, 
using data submitted by that company. These models may be adjusted over 
time. The Board will use a separate methodology or a combination of 
methodologies--potentially including covered companies' internal 
models, if appropriate--to estimate projected losses related to covered 
companies' trading portfolio or counterparty credit-risk exposures in 
the event of an adverse market shock, taking into account the 
complexity and idiosyncrasies of each covered company's positions. The 
methodology may also incorporate an approach to estimate potential 
losses from stress factors specifically affecting the covered 
companies' other risks. Finally, the framework will include a set of 
methodologies to assess the effect of losses, pre-provision net 
revenue, provision for loan and lease losses, and other factors on pro 
forma capital levels and ratios.
    In response to commenters' requests for more clarity regarding the 
Board's assumptions used to calculate a covered company's stress test 
results, the Board is providing additional detail on the assumptions it 
intends to use to describe how a company's capital positions would 
change over time. To help ensure that the publicly disclosed results of 
supervisory stress tests are comparable across institutions and reflect 
the effect of common macroeconomic scenarios on net income and capital 
but not company-specific assumptions about capital distributions, the 
Board is applying a consistent approach to assumptions across 
companies.
    For the first quarter of the planning horizon, the Board will take 
into account the company's actual capital actions as of the end of the 
calendar quarter. For each of the second through ninth quarters of the 
planning horizon, the Board will include the following items in the 
projections of capital: (i) Common stock dividends equal to the 
quarterly average dollar amount of common stock dividends that the 
company paid in the previous year (that is, the first quarter of the 
planning horizon and the preceding three calendar quarters); (ii) 
payments on any other instrument that is eligible for inclusion in the 
numerator of a regulatory capital ratio equal to the stated dividend, 
interest, or principal due on such instrument during the quarter; and 
(iii) an assumption of no redemption or repurchase of any capital 
instrument that is eligible for inclusion in the numerator of a 
regulatory capital ratio.
    These assumptions are the same assumptions that covered companies 
are required to use in conducting their company-run stress tests, as 
described below in section III.E.3 of this SUPPLEMENTARY INFORMATION. 
Adopting a consistent, standardized approach across covered companies 
and across the supervisory and company-run stress tests will provide 
for improved comparability across companies and between the supervisory 
and company-run stress tests.
    Another element of the supervisory-stress test framework is a set 
of assumptions or models to describe how a covered company's balance 
sheet would change over time.\27\ Information about planned future 
acquisitions and divestitures by the companies will also be 
incorporated. These projections will then be analyzed to assess their 
combined effect on the covered company's capital position, including 
projected capital levels and capital ratios, at the end of each quarter 
in the planning horizon. The framework will incorporate all regulatory 
capital measures and the tier 1 common ratio. These projections used in 
the supervisory stress tests also will incorporate, as appropriate, any 
significant changes in or the significant effects of accounting 
requirements during the planning period.
---------------------------------------------------------------------------

    \27\ At times, the Board may assume in its supervisory stress 
tests that the covered company's balance sheet would change over 
time, following the paths projected by the company.

---------------------------------------------------------------------------

[[Page 62386]]

2. Description of Supervisory Assessment
    The Board, through its annual analyses, will evaluate each covered 
company as to whether the covered company has the capital, on a total 
consolidated basis, necessary to continue operating under economic and 
financial market conditions as contained in the designated scenarios. 
This evaluation will include, but will not be limited to, a review of 
the covered company's estimated losses, pre-provision net revenue, 
provision for loan and lease losses, and the extent of their effect on 
the company's capital levels and ratios, including pro forma regulatory 
capital ratios and the tier 1 common ratio.
3. Communication of Results to Covered Companies
    Under the Dodd-Frank Act, the Board is required to disclose a 
summary of the results of its annual analyses.\28\ In the NPR, the 
Board proposed that, prior to publishing a summary of the results of 
its annual analyses, the Board would convey to each covered company the 
results of the Board's analyses of that company and explain to the 
company any information that the Board expected to make public.
---------------------------------------------------------------------------

    \28\ 12 U.S.C. 5365(i)(1)(B)(v).
---------------------------------------------------------------------------

    Numerous commenters requested that the final rule include a formal 
appeals process to dispute the Board's findings prior to public release 
of stress test results. According to these commenters, banking 
organizations should have the opportunity to defend the results of 
their internal models against the results of supervisory stress tests, 
and explain any major differences in assumptions or potential drivers 
of divergent results between the two to the Board in a confidential 
manner prior to publication.
    The final rule does not provide for a process whereby a company 
would be able to appeal the results of its supervisory stress test. The 
Board's supervisory stress tests reflect the Board's independent 
estimates of revenue, losses, and capital under various scenarios, 
using consistent models and assumptions across all companies. Covered 
companies are separately required to disclose the results of their own 
stress tests, which will provide the company's own assessment of its 
capital adequacy under stress conditions that are consistent with those 
included in the Board's supervisory stress test.
    The Board expects to communicate the results of its supervisory 
stress tests to a company before it publicly discloses a summary of 
such results.
4. Post-Assessment Actions by Covered Companies
    Under the final rule, subsequent to receiving the results of the 
Board's annual analyses, each covered company must take the results of 
such analysis conducted by the Board into account in making changes, as 
appropriate, to the company's capital plan and capital structure 
(including the level and composition of capital) and its exposures, 
concentrations, and risk positions; and any plans of the company for 
recovery or resolution. In addition, each covered company must make 
such updates to its resolution plan (required to be submitted annually 
to the Board and FDIC pursuant to the Board's Regulation QQ (12 CFR 
part 243) and the FDIC's Part 381 (12 CFR part 381)) as the Board, 
based on the results of its analyses of the company, determines 
appropriate.
5. Publication of Results by the Board
    In the NPR, the Board proposed that, within a reasonable period of 
time after completing the annual analyses of covered companies (but no 
later than by mid-April of each calendar year), the Board would 
disclose a summary of the results of such analyses. The Board also said 
that it expected to disclose quarter-end results over the specified 
planning horizon that included estimated losses on a variety of lines 
of business, estimated allowance for loan and lease losses, and 
estimated pro forma regulatory and other capital ratios.
    In response, nearly all commenters advocated that the Board use 
more limited disclosures requirements for the supervisory and company-
run stress tests, suggesting that the disclosures proposed in the NPR 
go beyond what is mandated in the Act. In particular, nearly all 
commenters strongly recommended against the disclosure of the results 
under the baseline scenario. Commenters indicated the baseline scenario 
results would be perceived as earnings guidance, which may compel the 
banking organization to prioritize short-term results over more 
appropriate longer-term risk management and sustained long term 
results. Commenters also indicated that disclosure of baseline results 
may force the premature disclosure of future plans by the institution, 
create confusion among investors and the public, and give rise to 
liability under securities laws.
    Several commenters also suggested that the Board disclose the 
results using the template used to disclose the CCAR results, which 
they likened to publication of only the severely adverse results. 
Commenters expressed the view that the CCAR disclosure regime was 
appropriately balanced by providing useful information to market 
participants while simultaneously ensuring that disclosure of stress 
tests results does not result in providing earnings guidance.
    As noted above, the Board believes that public disclosure is a key 
component of stress test requirements mandated by the Act, and helps to 
provide valuable information to market participants, enhance 
transparency, and promote market discipline. However, the Board 
understands the concern that the disclosure of results (particularly 
baseline results) could be viewed as earnings guidance to the market. 
Thus, for the stress test conducted in 2012, the Board expects that, 
similar to the public disclosure following CCAR in early 2012, the 
Board will disclose results under the severely adverse scenario for 
each company that will include estimates of the following information:
     Pre-provision net revenue and other revenue;
     Provision for loan and lease losses, realized losses or 
gains on available-for-sale and held-to-maturity securities, trading 
and counterparty losses, and other losses or gains; \29\
---------------------------------------------------------------------------

    \29\ Other losses and gains include, but are not limited to 
projected losses on loans that are held-for-sale and held-for-
investment measured under the fair value option, and goodwill 
impairment.
---------------------------------------------------------------------------

     Net income before taxes;
     Loan losses (dollar amount and as a percentage of average 
portfolio balance) in aggregate and by subportfolio, including: 
Domestic closed-end first-lien mortgages; domestic junior lien 
mortgages and home equity lines of credit; commercial and industrial 
loans; commercial real estate loans; credit card exposures; other 
consumer loans; and all other loans; and
     Pro forma regulatory and other capital ratios (including 
the tier 1 common ratio, as defined in the capital plan rule, and any 
other capital ratios specified by the Board).
    The Board expects that the results relating to pre-provision net 
revenue and other revenue; provision for loan and lease losses, 
realized losses/gains on available-for-sale and held-to-maturity 
securities, trading and counterparty losses, and other losses or gains; 
net income before taxes; loan losses in the aggregate and by 
subportfolio will include the cumulative total over the planning 
horizon, and the regulatory and other capital ratios will include at 
least the actual capital ratio

[[Page 62387]]

as of September 30, 2012, and the minimum and ending capital ratios 
over the planning horizon. In addition, the Board may include 
additional elements under the severely adverse scenario, as it deems 
appropriate. The Board will disclose these summary results no later 
than March 31 of a calendar year.
    As the Board implements the Dodd-Frank stress testing requirements, 
it intends to evaluate whether public disclosure of the results of the 
adverse and baseline would assist in informing the company and market 
participants about the condition of the banking organization. The Board 
expects to revisit the scope of the disclosure from time to time, and 
may disclose the results under the adverse and baseline scenario in the 
future.
    In response to commenters' concerns that market participants may 
misunderstand the published results of the Board's analyses, the Board 
emphasizes that there are certain factors to bear in mind when 
interpreting these published results. For example, the outputs of the 
analyses might not align with those produced by other parties 
conducting similar exercises, even if a similar set of scenarios were 
used, due to differences in methodologies and assumptions used to 
produce those outputs. In addition, the outputs under the severely 
adverse scenarios should not be viewed as forecasts or expected 
outcomes or as a measure of any covered company's solvency. Instead, 
those outputs are the estimates from forward-looking exercises that 
consider possible outcomes based on a set of hypothetical scenarios.

E. Annual and Mid-Cycle Stress Tests Conducted by the Covered Companies

1. Overview
    The final rule requires each covered company to conduct an annual 
stress test by January 5 of each calendar year and a mid-cycle stress 
test by July 5 of each calendar year. A stress test is defined as a 
process to assess the potential impact of scenarios on the consolidated 
earnings, losses, and capital of a covered company over the planning 
horizon, taking into account its current condition, risks, exposures, 
strategies, and activities.
    A covered company is required to run its annual stress test using 
financial data as of September 30 of the preceding calendar year and 
its mid-cycle stress test using financial data as of March 31 of the 
preceding calendar year. The following discussion describes the 
scenarios, methodology, and practices that a company will use in 
conducting the annual and mid-cycle stress tests and disclosure 
requirements applicable to the company.
2. Scenarios
    For the annual stress test, covered companies will use the same 
scenarios as the Board will use for its supervisory stress analysis. 
The scenarios will include a minimum of three different sets of 
economic and financial conditions, including baseline, adverse, and 
severely adverse scenarios, which covered companies will be required to 
use to conduct their annual company-run stress tests. The Board will 
publish baseline, adverse, and severely adverse scenarios by no later 
than November 15 of each year, except with respect to additional 
components or scenarios described below.
    As discussed in section III.C.3 of the SUPPLEMENTARY INFORMATION, 
the Board may require a covered company with significant trading 
activity, as determined by the Board and reflected on the FR Y-14, to 
include a global market shock component in its adverse and severely 
adverse scenario that measures potential stress losses from trading 
activities and counterparty exposures in its stress test.\30\ The data 
used in this component for purposes of the annual company-run stress 
test will have an as-of date between October 1 and December 1 of that 
calendar year selected by the Board and the as-of date will be 
communicated to the company no later than December 1 of the calendar 
year.
---------------------------------------------------------------------------

    \30\ As of September 30, 2012, companies subject to the global 
market shock scenario included those bank holding companies with 
total consolidated assets of $500 billion or more that are subject 
to the market-risk measure set forth in Appendix E of the Board's 
Regulation Y (12 CFR Part 225, Appendix E).
---------------------------------------------------------------------------

    In addition, depending on the systemic footprint and scope of 
operations and activities of a covered company, the Board may require 
the company to use additional components in its adverse and severely 
adverse or to use additional or more complex scenarios that are 
designed to capture salient risks stemming from specific lines of 
business.\31\ Scenarios may also include stress factors, such as 
operational risk, that materially affect the financial condition of a 
covered company but are not directly correlated to macroeconomic or 
financial assumptions.
---------------------------------------------------------------------------

    \31\ In making this assessment, the Board will consider the 
financial condition, size, complexity, risk profile, scope of 
operations, or activities, or risks to the U.S. economy of the 
company.
---------------------------------------------------------------------------

    The Board will notify a covered company in writing no later than 
September 30 that it will be required to include additional components 
in its adverse and severely adverse scenarios or additional scenarios 
in its stress test. The notification will include the basis for 
requiring the company to include the additional components or 
additional scenarios in its stress test. Within 14 calendar days of 
receipt of a notification, a covered company may request in writing 
that the Board reconsider the requirement that the company include 
additional components or additional scenarios in its stress test, 
including an explanation as to why the reconsideration should be 
granted. The Board will respond in writing within 14 calendar days of 
receipt of the covered company's request. The Board will provide a 
covered company with a description of any additional components or 
additional scenarios, including the trading component described above, 
by December 1.
    Under the final rule, the Board will not provide scenarios to 
covered companies for the mid-cycle company-run stress tests. Rather, 
for the mid-cycle company-run stress test, a covered company will be 
required to develop and use a minimum of three sets of its own 
scenarios--a baseline, adverse, and severely adverse scenario. The 
Board anticipates that covered companies may use a variety of 
quantitative and qualitative approaches to develop the scenarios. The 
adverse and severely adverse scenarios used in mid-cycle stress tests 
should reflect a company's unique vulnerabilities to factors that 
affect its firm-wide activities and risk exposures, including 
macroeconomic, market-wide, and firm-specific events. The Board expects 
the companies to consider their own risk profiles and operations in 
designing specific elements of the adverse and severely adverse 
scenarios. If appropriate, the Board will publish additional guidance 
to covered companies describing the considerations they should take 
into account in developing the scenarios for the mid-cycle company-run 
stress tests.
    The Board may require a covered company to include additional 
components or scenarios in its stress test based on the company's 
financial condition, size, complexity, risk profile, scope of 
operations, or activities, or risks to the U.S. economy. The notice and 
response procedures are parallel to those applicable in the annual 
company-run stress test.
3. Methodologies and Practices
    Under the final rule, a covered company will be required to use the 
applicable scenarios discussed above in conducting its stress tests to 
calculate, for each quarter-end within the

[[Page 62388]]

planning horizon, potential losses, pre-provision net revenue, 
provision for loan and lease losses, and capital levels over the 
planning horizon. Each covered company will also be required to 
calculate, for each quarter in the planning horizon, the potential 
effect of the specific scenarios on its regulatory capital ratios and 
tier 1 common ratio.
    Several commenters asked that the Board generally adopt the 
disclosure approach it used in CCAR 2012, which provided for a uniform 
set of assumptions of capital actions across bank holding companies. In 
response to these commenters and to enable comparisons across firms and 
between the company-run and supervisory stress tests, the final rule 
requires a covered company to make the following assumptions regarding 
its capital actions over the planning horizon. For the first quarter of 
the planning horizon, the covered company must take into account its 
actual capital actions as of the end of the calendar quarter. For each 
of the second through ninth quarters of the planning horizon, the 
covered company must include the following items in the projections of 
capital: (i) Common stock dividends equal to the quarterly average 
dollar amount of common stock dividends that the company paid in the 
previous year (that is, the first quarter of the planning horizon and 
the preceding three calendar quarters); (ii) payments on any other 
instrument that is eligible for inclusion in the numerator of a 
regulatory capital ratio equal to the stated dividend, interest, or 
principal due on such instrument during the quarter; and (iii) an 
assumption of no redemption or repurchase of any capital instrument 
that is eligible for inclusion in the numerator of a regulatory capital 
ratio. The Board is requiring companies to adopt a standard approach to 
developing these assumptions to ensure that the publicly disclosed 
results of company-run stress tests are comparable across institutions 
and reflect the effect of common macroeconomic scenarios on net income 
and capital but not company-specific assumptions about capital 
distributions.
    The proposed rule would have required a covered company to 
establish and maintain a system of controls, oversight, and 
documentation, including policies and procedures, designed to ensure 
that the stress testing processes were effective. It also would have 
required the board of directors and senior management of the covered 
company to annually review the controls, oversight, and documentation 
established pursuant to the final rule.
    Several commenters asked for clarification on the roles of the 
board of directors and senior management in establishing and reviewing 
these controls. In response to these commenters, the final rule 
clarifies that the senior management is responsible for establishing 
and maintaining a system of controls, oversight, and documentation, 
including policies and procedures, designed to ensure that the stress 
testing processes used by the company are effective in meeting the 
requirements of the final rule. The board of directors, or an 
appropriate committee thereof, is responsible for approving and 
reviewing the policies and procedures of the stress testing processes 
as frequently as economic conditions or the condition of the company 
may warrant, but no less than annually. The board of directors and 
senior management of the company must receive a summary of the results 
of the stress test.
    The company's policies and procedures must, at a minimum, outline 
the company's stress testing practices and methodologies, and processes 
for validating and updating the company's stress testing practices and 
methodologies consistent with applicable laws, regulations, and 
supervisory guidance. Each covered company must also include in its 
policies information describing its processes for scenario development 
for the mid-cycle stress test required under the final rule.
    The final rule also requires that the board of directors and senior 
management of each covered company to consider the results of the 
stress tests when developing and maintaining the covered company's 
capital plan and capital planning processes and any plans for recovery 
and resolution, and assessing the exposures, concentration, and risk 
positions, including under times of stress, in light of the bank's risk 
profile.
4. Publication of Results by the Company
    Under the proposal, consistent with the requirements of the Dodd-
Frank Act, a covered company would have been required to disclose a 
summary of the results of its company-run stress tests within 75 days 
of submitting its required report to the Board.
    Consistent with comments on the supervisory stress testing 
disclosure, nearly all commenters suggested that companies should not 
be required to disclose information relating to their baseline results 
or on a quarter-by-quarter basis, and that the Board adopt the template 
used in reporting the CCAR results.
    As noted above, the Board believes that public disclosure is a key 
component of stress test requirements mandated by the Act, and helps to 
provide valuable information to market participants, enhance 
transparency, and facilitate market discipline. However, the Board also 
understands the concern that the disclosure of results (particularly 
baseline results) could be viewed as earnings guidance to the market. 
Thus, the final rule requires banking organizations to disclose only 
the severely adverse results. As companies begin conducting company-run 
stress tests, submitting the results of all scenarios to the Board, and 
disclosing a summary of their results under the severely adverse 
scenario, the Board expects to evaluate whether public disclosure of 
the results of the adverse and baseline scenarios would assist the 
public in understanding the condition of the banking organization. 
Thus, the Board expects to revisit the scope of required public 
disclosure from time to time, and may determine to require disclosure 
of the results under the adverse and baseline scenarios in the future.
    At a minimum, the publication of summary results by a covered 
company must include with respect to the severely adverse scenario:
    (i) A description of the types of risks included in the stress 
test;
    (ii) A general description of the methodologies used in the stress 
test, including those employed to estimate losses, revenues, provision 
for loan and lease losses, and changes in capital positions over the 
planning horizon;
    (iii) Results of company-run stress tests, including, but not 
limited to estimated:
     Pre-provision net revenue and other revenue;
     Provision for loan and lease losses, realized losses/gains 
on available-for-sale and held-to-maturity securities), trading and 
counterparty losses, and other losses/gains; \32\
---------------------------------------------------------------------------

    \32\ Other losses and gains include, but are not limited to 
projected losses on loans that are held-for-sale and held-for-
investment measured under the fair value option, and goodwill 
impairment.
---------------------------------------------------------------------------

     Net income before taxes;
     Loan losses (dollar amount and as a percentage of average 
portfolio balance) in the aggregate and by subportfolio, including: 
Domestic closed-end first-lien mortgages; domestic junior lien 
mortgages and home equity lines of credit; commercial and industrial 
loans; commercial real estate loans; credit card exposures; other

[[Page 62389]]

consumer loans; and all other loans; \33\ and
---------------------------------------------------------------------------

    \33\ In the proposed rule, the Board noted that it expected 
covered companies to disclose the loan loss results of their 
company-run stress tests in the aggregate and by subportfolio. In 
response to commenters' requests for clarity on disclosure 
expectations, the final rule specifies the subportfolios for which a 
company will be required to disclose loan losses.
---------------------------------------------------------------------------

     Pro forma regulatory capital ratios and the tier 1 common 
ratio; and
    (iv) An explanation of the most significant causes for the changes 
in regulatory capital ratios and tier 1 common ratio.
    The results disclosed by covered companies must include the 
cumulative total for (1) pre-provision net revenue and other revenue; 
(2) provision for loan and lease losses, realized losses/gains on 
available-for-sale and held-to-maturity securities, trading and 
counterparty losses, and other losses or gains; (3) net income before 
taxes; and (4) loan losses in the aggregate and by subportfolio over 
the planning horizon. The disclosure of pro forma capital ratios must 
include at least the actual beginning ratios (as of September 30 for 
annual stress tests and as of March 31 for mid-cycle stress tests), the 
ending ratios, and the minimum ratios over the planning horizon.
    Several commenters suggested that regulatory agencies coordinate 
disclosure requirements for multiple banking organizations within a 
single parent company as the release of conflicting test results could 
confuse market participants. Additionally, commenters recommended more 
limited disclosure requirements for depository institution 
subsidiaries.
    In response to these comments, the final rule requires bank holding 
companies that are covered companies to include in their public 
disclosure a summary of any company-run stress test conducted by a 
depository institution subsidiary that is required to disclose a 
summary of stress test results under applicable regulations.\34\ The 
public disclosures with respect to a depository institution subsidiary 
must include changes in pro forma regulatory capital ratios of the 
depository institution subsidiary over the planning horizon, including 
an explanation of the most significant causes for the changes in those 
ratios. For subsidiary state member banks, the Board expects that this 
disclosure will include a general description of methodologies used to 
estimate capital actions over the planning horizon. As described in the 
concurrently issued final rule applicable to state member banks with 
total consolidated assets of more than $10 billion, disclosure by a 
bank holding company of the results of its state member bank 
subsidiary's stress test will satisfy public disclosure requirements 
applicable to that subsidiary under section 165(i)(2) of the Dodd-Frank 
Act, unless the Board determines that the disclosures at the holding 
company level do not adequately capture the potential impact of the 
scenarios on the capital of the state member bank.
---------------------------------------------------------------------------

    \34\ See, e.g., 12 CFR 252.157(b)(2).
---------------------------------------------------------------------------

IV. Administrative Law Matters

A. Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The Board invited comment on whether the proposed rule 
was written plainly and clearly, or whether there were ways the Board 
could make the rule easier to understand. The Board received no 
comments on these matters and believes that the final rule is written 
plainly and clearly.

B. Paperwork Reduction Act Analysis

Request for Comment on Final Information Collection
    In accordance with section 3512 of the Paperwork Reduction Act of 
1995 (44 U.S.C. 3501-3521) (PRA), the Board 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 OMB control number will be 
assigned. The Board reviewed the final rule under the authority 
delegated to the Board by OMB.
    The final rule contains requirements subject to the PRA. The 
recordkeeping requirements are found in section 252.146(c)(1) \35\ 
(formerly section 252.145(b)(1) in the proposed rule) and the 
disclosure requirements are found in section 252.148. These information 
collection requirements will implement sections 165(i)(1) and (2) of 
the Dodd-Frank Act for covered companies, as mentioned in the Abstract 
below.
---------------------------------------------------------------------------

    \35\ Some of the recordkeeping requirements for Subpart G--
Company-Run Stress Test Requirements for Covered Companies have been 
addressed in the proposed Recordkeeping and Disclosure Provisions 
Associated with Stress Testing Guidance (FR 4202). See the Federal 
Register notice published on June 15, 2011 (76 FR 35072). Only new 
recordkeeping requirements are being addressed with this proposed 
rulemaking
---------------------------------------------------------------------------

    The reporting requirements found in section 252.137(b) have been 
addressed in the Resolution Plans Required Regulation (Reg QQ; OMB No. 
7100-0346).\36\ The reporting requirements found in sections 
252.135(a), 252.144, 252.146(a), and 252.147(a)(1) have been 
incorporated into the Capital Assessments and Stress Testing (FR Y-14; 
OMB No. 7100-0341). The reporting requirements found in sections 
252.145 and 252.147(a)(2) will be addressed as separate Federal 
Register notice for the FR Y-14 at a later date. The recordkeeping 
requirements found in section 252.137(a)(1) have been incorporated into 
the Capital Plans Regulation (Reg Y-13; OMB No. 7100-0342).
---------------------------------------------------------------------------

    \36\ See the Federal Register notice published on November 1, 
2011 (76 FR 67323).
---------------------------------------------------------------------------

    The Board received general comments regarding the burden of the 
proposed rule. In response to these comments and to reduce burden, only 
covered companies that are bank holding companies and that participated 
in SCAP will be required to conduct a stress test under the final rule 
this year. Other bank holding companies that are covered companies with 
$50 billion or more in total consolidated assets will not begin 
conducting stress tests under the final rule until fall 2013.
    The Board has an ongoing interest in your comments.
    Comments are invited on:
    (a) Whether the proposed collections of information are necessary 
for the proper performance of the Federal Reserve's functions, 
including whether the information has practical utility;
    (b) The accuracy of the Federal Reserve's estimate of the burden of 
the proposed information collections, including the validity of the 
methodology and assumptions used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on 
aspects of this notice that may affect reporting, recordkeeping, or 
disclosure requirements and burden estimates should be sent to the 
addresses listed in the ADDRESSES section. A copy of the comments may 
also be submitted to the OMB desk officer for the Agencies: By mail to 
U.S. Office of Management and Budget, 725 17th Street NW., 
10235,

[[Page 62390]]

Washington, DC 20503 or by facsimile to 202-395-5806, Attention, 
Commission and Federal Banking Agency Desk Officer.
    Title of Information Collection: Recordkeeping and Disclosure 
Requirements Associated with Regulation YY (Subparts F and G).
    Frequency of Response: Annual and semiannual.
    Affected Public: Businesses or other for-profit.
    Respondents: U.S. bank holding companies and nonbank financial 
companies.
    Abstract: Section 165 of the Dodd-Frank Act implements the enhanced 
prudential standards. The enhanced standards include risk-based capital 
and leverage requirements, liquidity standards, requirements for 
overall risk management (including establishing a risk committee), 
single-counterparty credit limits, stress test requirements, and debt-
to-equity limits for companies that the Council has determined pose a 
grave threat to financial stability.
    Section 252.146(c)(1) requires that each covered company must 
establish and maintain a system of controls, oversight, and 
documentation, including policies and procedures, that are designed to 
ensure that its stress testing processes are effective in meeting the 
requirements in Subpart G. These policies and procedures must, at a 
minimum, describe the covered company's stress testing practices and 
methodologies, and processes for validating and updating the covered 
institution's stress test practices and methodologies consistent with 
applicable laws, regulations, and supervisory guidance. Policies of 
covered companies must describe processes for scenario development for 
the mid-cycle stress test required under section 252.145.
    Section 252.148 requires a covered company to publish a summary of 
the results of the stress test required under section 252.144 in the 
period beginning on March 15 and ending on March 31, unless that time 
is extended by the Board in writing. A covered company must also 
publish a summary of the results of the stress test required under 
section 252.145 in the period beginning on September 15 and ending on 
September 30, unless that time is extended by the Board in writing. The 
information disclosed by each covered company, at a minimum, include 
the following information regarding the severely adverse scenario: (1) 
A description of the types of risks being included in the stress test; 
(2) a general description of the methodologies used in the stress test, 
including those employed to estimate losses, revenues, provision for 
loan and lease losses, and changes in capital positions over the 
planning horizon; (3) estimates of pre-provision net revenue and other 
revenue; provisions for loan and lease losses, realized losses/gains on 
available-for-sale and held-to-maturity securities, trading and 
counterparty losses, and other losses or gains; net income before 
taxes; loan losses (dollar amount and as a percentage of average 
portfolio balance) in the aggregate and by subportfolio, including: 
Domestic first-lien mortgages; domestic junior lien and home equity 
lines of credit; commercial and industrial loans; commercial real 
estate loans; credit cards; other consumer loans; and all other loans; 
and regulatory capital ratios and the tier 1 common ratio; (4) an 
explanation of the most significant causes for the changes in 
regulatory capital ratios and tier 1 common ratio; and (5) with respect 
to a stress test conducted by an insured depository institution 
subsidiary of the covered company pursuant to subpart H of this part 
252, changes in regulatory capital ratios of the depository institution 
subsidiary over the planning horizon, including an explanation of the 
most significant causes for the changes in regulatory capital ratios.
    Estimated Paperwork Burden
    Estimated Burden per Response:
    Section 252.146(c)(1) recordkeeping--40 hours (Initial setup 280 
hours for U.S. bank holding companies $50 billion and over in total 
consolidated assets).
    Section 252.148 disclosure--80 hours (Initial setup 200 hours).
    Number of respondents: 34 U.S. bank holding companies with total 
consolidated assets of $50 billion or more.
    Total estimated annual burden: 29,920 hours (23,120 hours for 
initial setup and 6,800 hours for ongoing compliance).

C. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
requires each federal agency to prepare a final regulatory flexibility 
analysis in connection with the promulgation of a final rule, or 
certify that the final rule will not have a significant economic impact 
on a substantial number of small entities.\37\ The Board believes that 
the final rule will not have a significant economic impact on a 
substantial number of small entities, but nonetheless is conducting the 
RFA analysis for this final rule.
---------------------------------------------------------------------------

    \37\ See 5 U.S.C. 603, 604 and 605.
---------------------------------------------------------------------------

    In accordance with section 165(i)(1) and (2) of the Dodd-Frank Act, 
the Board is adopting the final rule as Regulation YY and adding new 
Part 252 (12 CFR part 252) to establish the requirements that a covered 
company provide data to support the Board's annual supervisory stress 
test and conduct company-run stress tests semi-annually.\38\ The 
reasons and justification for the final rule are described in the 
SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------

    \38\ See 12 U.S.C. 5365(i)(1) and (2).
---------------------------------------------------------------------------

    Under regulations issued by the Small Business Administration 
(SBA), a ``small entity'' includes those firms within the ``Finance and 
Insurance'' sector with asset sizes that vary from $7 million or less 
in assets to $175 million or less in assets.\39\ The Board believes 
that the Finance and Insurance sector constitutes a reasonable universe 
of firms for these purposes because such firms generally engage in 
actives that are financial in nature. Consequently, bank holding 
companies or nonbank financial companies with assets sizes of $175 
million or less are small entities for purposes of the RFA.
---------------------------------------------------------------------------

    \39\ 13 CFR 121.201.
---------------------------------------------------------------------------

    As discussed in the SUPPLEMENTARY INFORMATION, the final rule 
applies to a ``covered company,'' which includes only bank holding 
companies with $50 billion or more in total consolidated assets, and 
nonbank financial companies that the Council has determined under 
section 113 of the Dodd-Frank Act must be supervised by the Board and 
for which such determination is in effect. Bank holding companies that 
are subject to the final rule therefore substantially exceed the $175 
million asset threshold at which a banking entity is considered a 
``small entity'' under SBA regulations. The final rule will apply to a 
nonbank financial company supervised by the Board regardless of such a 
company's asset size. Although the asset size of nonbank financial 
companies may not be the determinative factor of whether such companies 
may pose systemic risks and would be designated by the Council for 
supervision by the Board, it is an important consideration.\40\ It is 
therefore unlikely that a financial firm that is at or below the $175 
million asset threshold would be designated by the Council under 
section 113 of the Dodd-Frank Act because material financial distress 
at such firms, or the nature,

[[Page 62391]]

scope, size, scale, concentration, interconnectedness, or mix of it 
activities, are not likely to pose a threat to the financial stability 
of the United States.
---------------------------------------------------------------------------

    \40\ See Authority To Require Supervision and Regulation of 
Certain Nonbank Financial Companies, 77 FR 21637 (April 11, 2012) 
(to be codified at 12 CFR part 1310).
---------------------------------------------------------------------------

    As noted above, because the final rule is not likely to apply to 
any company with assets of $175 million or less, the final rule is not 
expected to apply to any small entity for purposes of the RFA. 
Moreover, as discussed in the SUPPLEMENTARY INFORMATION, the Dodd-Frank 
Act requires the Board to adopt rules implementing the provisions of 
section 165(i)(2) of the Dodd-Frank Act. The Board does not believe 
that the final rule would have a significant economic impact on a 
substantial number of small entities or that the final rule duplicates, 
overlaps, or conflicts with any other Federal rules.

List of Subjects in 12 CFR Part 252

    Administrative practice and procedure, Banks, Banking, Federal 
Reserve System, Holding companies, Nonbank Financial Companies 
Supervised by the Board, Reporting and recordkeeping requirements, 
Securities, Stress Testing.

Authority and Issuance

    For the reasons stated in the preamble, the Board of Governors of 
the Federal Reserve System adds 12 CFR part 252 to read as follows:

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

Sec.
Subparts A--E [Reserved]
Subpart F--Supervisory Stress Test Requirements for Covered Companies
252.131 Authority and purpose.
252.132 Definitions.
252.133 Applicability.
252.134 Annual analysis conducted by the Board.
252.135 Data and information required to be submitted in support of 
the Board's analyses.
252.136 Review of the Board's analysis; publication of summary 
results.
252.137 Use requirement.
Subpart G--Company-Run Stress Test Requirements for Covered Companies
252.141 Authority and purpose.
252.142 Definitions.
252.143 Applicability.
252.144 Annual stress test.
252.145 Mid-cycle stress test.
252.146 Methodologies and practices.
252.147 Reports of stress test results.
252.148 Disclosure of stress test results.
Subpart H [Reserved]
Subpart I [Reserved]


    Authority: 12 U.S.C. 321-338a, 1467a(g), 1818, 1831p-1, 1844(b), 
1844(c), 5361, 5365, 5366.

Subparts A--E [Reserved]

Subpart F--Supervisory Stress Test Requirements for Covered 
Companies


Sec.  252.131  Authority and purpose.

    (a) Authority. 12 U.S.C. 321-338a, 1467a(g), 1818, 1831p-1, 
1844(b), 1844(c), 5361, 5365, 5366.
    (b) Purpose. This subpart implements section 165(i)(1) of the Dodd-
Frank Act (12 U.S.C. 5365(i)(1)), which requires the Board to conduct 
annual analyses of nonbank financial companies supervised by the Board 
and bank holding companies with $50 billion or more in total 
consolidated assets to evaluate whether such companies have the 
capital, on a total consolidated basis, necessary to absorb losses as a 
result of adverse economic conditions.


Sec.  252.132  Definitions.

    For purposes of this subpart, the following definitions apply:
    (a) Adverse scenario means a set of conditions that affect the U.S. 
economy or the financial condition of a covered company that are more 
adverse than those associated with the baseline scenario and may 
include trading or other additional components.
    (b) Average total consolidated assets means the average of the 
total consolidated assets as reported by a bank holding company on its 
Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) 
for the four most recent consecutive quarters. If the bank holding 
company has not filed the FR Y-9C for each of the four most recent 
consecutive quarters, average total consolidated assets means the 
average of the company's total consolidated assets, as reported on the 
company's FR Y-9C, for the most recent quarter or consecutive quarters. 
Average total consolidated assets are measured on the as-of date of the 
most recent FR Y-9C used in the calculation of the average.
    (c) Bank holding company has the same meaning as in section 
225.2(c) of the Board's Regulation Y (12 CFR 225.2(c)).
    (d) Baseline scenario means a set of conditions that affect the 
U.S. economy or the financial condition of a covered company and that 
reflect the consensus views of the economic and financial outlook.
    (e) Covered company means:
    (1) A bank holding company (other than a foreign banking 
organization) with average total consolidated assets of $50 billion or 
more; and
    (2) A nonbank financial company supervised by the Board.
    (f) Depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
    (g) Foreign banking organization has the same meaning as in section 
211.21(o) of the Board's Regulation K (12 CFR 211.21(o)).
    (h) Nonbank financial company supervised by the Board means a 
nonbank financial company that the Financial Stability Oversight 
Council has determined under section 113 of the Dodd-Frank Act (12 
U.S.C. 5323) shall be supervised by the Board and for which such 
determination is still in effect.
    (i) Planning horizon means the period of at least nine quarters, 
beginning on the first day of a stress test cycle (on October 1) over 
which the relevant projections extend.
    (j) Pre-provision net revenue means the sum of net interest income 
and non-interest income less expenses before adjusting for loss 
provisions.
    (k) Provision for loan and lease losses means the provision for 
loan and lease losses as reported by the covered company on the FR Y-
9C.
    (l) Regulatory capital ratio means a capital ratio for which the 
Board established minimum requirements by regulation or order, 
including a company's leverage ratio and tier 1 and total risk-based 
capital ratios as calculated under the Board's regulations, including 
appendices A, D, E, and G to 12 CFR part 225 or any successor 
regulation.
    (m) Scenarios are those sets of conditions that affect the U.S. 
economy or the financial condition of a covered company that the Board 
annually determines are appropriate for use in the supervisory stress 
tests, including, but not limited to, baseline, adverse, and severely 
adverse scenarios.
    (n) Severely adverse scenario means a set of conditions that affect 
the U.S. economy or the financial condition of a covered company and 
that overall are more severe than those associated with the adverse 
scenario and may include trading or other additional components.
    (o) Stress test cycle means the period between October 1 of a 
calendar year and September 30 of the following calendar year. For the 
purposes of the stress test cycle commencing in 2012, such cycle will 
begin on November 15, 2012.

[[Page 62392]]

    (p) Subsidiary has the same meaning as in section 225.2(o) of the 
Board's Regulation Y (12 CFR 225.2).
    (q) Tier 1 common ratio has the same meaning as in section 
225.8(c)(9) of the Board's Regulation Y (12 CFR 225.8(c)(9)).


Sec.  252.133  Applicability.

    (a) Compliance date for bank holding companies that are covered 
companies as of November 15, 2012. (1) In general. Except as provided 
in paragraph (a)(2) or (a)(3) of this section, a bank holding company 
that is a covered company as of November 15, 2012, must comply with the 
requirements of this subpart beginning with the stress test cycle that 
commences on October 1, 2013, unless that time is extended by the Board 
in writing.
    (2) 2009 Supervisory Capital Assessment Program. A bank holding 
company that participated in the 2009 Supervisory Capital Assessment 
Program, or a successor to such a bank holding company, must comply 
with the requirements of this subpart beginning with the stress test 
cycle that commences on November 15, 2012, unless that time is extended 
by the Board in writing.
    (3) SR Letter 01-01. A U.S.-domiciled bank holding company that is 
a covered company as of November 15, 2012, and is a subsidiary of a 
foreign banking organization that is currently relying on Supervision 
and Regulation Letter SR 01-01 issued by the Board (as in effect on May 
19, 2010) must comply with the requirements of this subpart beginning 
with the stress test cycle that commences on October 1, 2015, unless 
that time is extended by the Board in writing.
    (b) Compliance date for institutions that become covered companies 
after November 15, 2012. (1) Bank holding companies. A bank holding 
company that becomes a covered company after November 15, 2012, must 
comply with the requirements of this subpart beginning with the stress 
test cycle that commences in the calendar year after the year in which 
the bank holding company becomes a covered company, unless that time is 
extended by the Board in writing.
    (2) Nonbank financial companies supervised by the Board. A company 
that becomes a nonbank financial company supervised by the Board must 
comply with the requirements of this subpart beginning with the stress 
test cycle that commences in the calendar year after the year in which 
the company first becomes subject to the Board's minimum regulatory 
capital requirements, unless the Board accelerates or extends the 
compliance date.
    (c) Ongoing application. A bank holding company that is a covered 
company will remain subject to the requirements of this subpart unless 
and until its total consolidated assets fall below $50 billion for each 
of four consecutive quarters, as reported on the FR Y-9C. The 
calculation will be effective on the as-of date of the fourth 
consecutive FR Y-9C.


Sec.  252.134  Annual analysis conducted by the Board.

    (a) In general. (1) On an annual basis, the Board will conduct an 
analysis of each covered company's capital, on a total consolidated 
basis, taking into account all relevant exposures and activities of 
that covered company, to evaluate the ability of the covered company to 
absorb losses in specified economic and financial conditions.
    (2) The analysis will include an assessment of the projected 
losses, net income, and pro forma capital levels and regulatory capital 
ratios, tier 1 common ratio, and other capital ratios for the covered 
company and use such analytical techniques that the Board determines 
are appropriate to identify, measure, and monitor risks of the covered 
company that may affect the financial stability of the United States.
    (3) In conducting the analyses, the Board will coordinate with the 
appropriate primary financial regulatory agencies and the Federal 
Insurance Office, as appropriate.
    (b) Economic and financial scenarios related to the Board's 
analysis. The Board will conduct its analysis under this section using 
a minimum of three different scenarios, including a baseline scenario, 
adverse scenario, and severely adverse scenario. The Board will notify 
covered companies of the scenarios that the Board will apply to conduct 
the analysis for each stress test cycle by no later than November 15 of 
each year, except with respect to trading or any other components of 
the scenarios and any additional scenarios that the Board will apply to 
conduct the analysis, which will be communicated by no later than 
December 1.


Sec.  252.135  Data and information required to be submitted in support 
of the Board's analyses.

    (a) Regular submissions. Each covered company must submit to the 
Board such data, on a consolidated basis, that the Board determines is 
necessary in order for the Board to derive the relevant pro forma 
estimates of the covered company over the planning horizon under the 
scenarios described in Sec.  252.134(b).
    (b) Additional submissions required by the Board. The Board may 
require a covered company to submit any other information on a 
consolidated basis that the Board deems necessary in order to:
    (1) Ensure that the Board has sufficient information to conduct its 
analysis under this subpart; and
    (2) Project a company's pre-provision net revenue, losses, 
provision for loan and lease losses, and net income; and, pro forma 
capital levels, regulatory capital ratios, tier 1 common ratio, and any 
other capital ratio specified by the Board under the scenarios 
described in section 252.134(b).
    (c) Confidential treatment of information submitted. The 
confidentiality of information submitted to the Board under this 
subpart and related materials shall be determined in accordance with 
the Freedom of Information Act (5 U.S.C. 552(b)) and the Board's Rules 
Regarding Availability of Information (12 CFR part 261).


Sec.  252.136  Review of the Board's analysis; publication of summary 
results.

    (a) Review of results. Based on the results of the analysis 
conducted under this subpart, the Board will conduct an evaluation to 
determine whether the covered company has the capital, on a total 
consolidated basis, necessary to absorb losses and continue its 
operation by maintaining ready access to funding, meeting its 
obligations to creditors and other counterparties, and continuing to 
serve as a credit intermediary under baseline, adverse and severely 
adverse scenarios, and any additional scenarios.
    (b) Communication of results to covered companies. The Board will 
convey to a covered company a summary of the results of the Board's 
analyses of such covered company within a reasonable period of time, 
but no later than March 31.
    (c) Publication of results by the Board. By March 31 of each 
calendar year, the Board will disclose a summary of the results of the 
Board's analyses of a covered company.


Sec.  252.137  Use requirement.

    (a) In general. The board of directors and senior management of 
each covered company must consider the results of the analysis 
conducted by the Board under this subpart, as appropriate:
    (1) As part of the covered company's capital plan and capital 
planning process, including when making changes to the covered 
company's capital structure (including the level and composition of 
capital);
    (2) When assessing the covered company's exposures, concentrations, 
and risk positions; and

[[Page 62393]]

    (3) In the development or implementation of any plans of the 
covered company for recovery or resolution.
    (b) Resolution plan updates. Each covered company must update its 
resolution plan as the Board determines appropriate, based on the 
results of the Board's analyses of the covered company under this 
subpart.

Subpart G--Company-Run Stress Test Requirements for Covered 
Companies


Sec.  252.141  Authority and purpose.

    (a) Authority. 12 U.S.C. 321-338a, 1467a(g), 1818, 1831p-1, 
1844(b), 1844(c), 5361, 5365, 5366.
    (b) Purpose. This subpart implements section 165(i)(2) of the Dodd-
Frank Act (12 U.S.C. 5365(i)(2)), which requires a covered company to 
conduct annual and semi-annual stress tests. This subpart also 
establishes definitions of stress test and related terms, methodologies 
for conducting stress tests, and reporting and disclosure requirements.


Sec.  252.142  Definitions.

    For purposes of this subpart, the following definitions apply:
    (a) Adverse scenario means a set of conditions that affect the U.S. 
economy or the financial condition of a covered company that are more 
adverse than those associated with the baseline scenario and may 
include trading or other additional components.
    (b) Average total consolidated assets means the average of the 
total consolidated assets as reported by a bank holding company on its 
Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) 
for the four most recent consecutive quarters. If the bank holding 
company has not filed the FR Y-9C for each of the four most recent 
consecutive quarters, average total consolidated assets means the 
average of the company's total consolidated assets, as reported on the 
company's FR Y-9C, for the most recent quarter or consecutive quarters. 
Average total consolidated assets are measured on the as of date of the 
most recent FR Y-9C used in the calculation of the average.
    (c) Bank holding company has the same meaning as in section 
225.2(c) of the Board's Regulation Y (12 CFR 225.2(c)).
    (d) Baseline scenario means a set of conditions that affect the 
U.S. economy or the financial condition of a covered company and that 
reflect the consensus views of the economic and financial outlook.
    (e) Capital action has the same meaning as in section 225.8(c)(1) 
of the Board's Regulation Y (12 CFR 225.8(c)(1)).
    (g) Covered company means:
    (1) A bank holding company (other than a foreign banking 
organization) with average total consolidated assets of $50 billion or 
more; and
    (2) A nonbank financial company supervised by the Board.
    (h) Depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
    (i) Foreign banking organization has the same meaning as in section 
211.21(o) of the Board's Regulation K (12 CFR 211.21(o)).
    (j) Nonbank financial company supervised by the Board means a 
nonbank financial company that the Financial Stability Oversight 
Council has determined under section 113 of the Dodd-Frank Act (12 
U.S.C. 5323) shall be supervised by the Board and for which such 
determination is still in effect.
    (k) Planning horizon means the period of at least nine quarters, 
beginning on the first day of a stress test cycle (on October 1 or 
April 1, as appropriate) over which the relevant projections extend.
    (l) Pre-provision net revenue means the sum of net interest income 
and non-interest income less expenses before adjusting for loss 
provisions.
    (m) Provision for loan and lease losses means the provision for 
loan and lease losses as reported by the covered company on the FR Y-
9C.
    (n) Regulatory capital ratio means a capital ratio for which the 
Board established minimum requirements by regulation or order, 
including a company's leverage ratio and tier 1 and total risk-based 
capital ratios as calculated under the Board's regulations, including 
appendices A, D, E, and G to 12 CFR part 225, and appendices A, B, E, 
and F to part 208 or any successor regulation.
    (o) Scenarios are those sets of conditions that affect the U.S. 
economy or the financial condition of a covered company that the Board, 
or with respect to the mid-cycle stress test required under section 
252.145 of this subpart, the covered company, annually determines are 
appropriate for use in the company-run stress tests, including, but not 
limited to, baseline, adverse, and severely adverse scenarios.
    (p) Severely adverse scenario means a set of conditions that affect 
the U.S. economy or the financial condition of a covered company and 
that overall are more severe than those associated with the adverse 
scenario and may include trading or other additional components.
    (q) Stress test means a process to assess the potential impact of 
scenarios on the consolidated earnings, losses, and capital of a 
covered company over the planning horizon, taking into account its 
current condition, risks, exposures, strategies, and activities.
    (r) Stress test cycle means the period between October 1 of a 
calendar year and September 30 of the following calendar year. For the 
purposes of the stress test cycle commencing in 2012, such cycle will 
begin on November 15, 2012.
    (s) Subsidiary has the same meaning as in section 225.2(o) the 
Board's Regulation Y (12 CFR 225.2).
    (t) Tier 1 common ratio has the same meaning as in section 
225.8(c)(9) of the Board's Regulation Y (12 CFR 225.8(c)(9)).


Sec.  252.143  Applicability.

    (a) Compliance date for bank holding companies that are covered 
companies as of November 15, 2012--(1) In general. Except as provided 
in paragraph (a)(2) or (a)(3) of this section, a bank holding company 
that is a covered company as of November 15, 2012, must comply with the 
requirements of this subpart beginning with the stress test cycle 
commencing on October 1, 2013, unless that time is extended by the 
Board in writing.
    (2) 2009 Supervisory Capital Assessment Program. A bank holding 
company that participated in the 2009 Supervisory Capital Assessment 
Program, or a successor to such a bank holding company, must comply 
with the requirements of this subpart beginning with the stress test 
cycle commencing on November 15, 2012, unless that time is extended by 
the Board in writing.
    (3) SR Letter 01-01. A U.S.-domiciled bank holding company that is 
a covered company as of November 15, 2012, and is a subsidiary of a 
foreign banking organization that is currently relying on Supervision 
and Regulation Letter SR 01-01 issued by the Board (as in effect on May 
19, 2010) must comply with the requirements of this subpart beginning 
with the stress test cycle commencing on October 1, 2015, unless that 
time is extended by the Board in writing.
    (b) Compliance date for institutions that become covered companies 
after November 15, 2012--(1) Bank holding companies. A bank holding 
company that becomes a covered company after November 15, 2012, must 
comply with the requirements of this subpart beginning with the stress 
test cycle that commences in the calendar year after the year in which 
the bank holding company becomes a covered company,

[[Page 62394]]

unless that time is extended by the Board in writing.
    (2) Nonbank financial companies supervised by the Board. A company 
that becomes a nonbank financial company supervised by the Board must 
comply with the requirements of this subpart beginning with the stress 
test cycle that commences in the calendar year after the year in which 
company first becomes subject to the Board's minimum regulatory capital 
requirements, unless the Board accelerates or extends the compliance 
date.
    (c) Ongoing application. A bank holding company that is a covered 
company will remain subject to the requirements of this subpart unless 
and until its total consolidated assets fall below $50 billion for each 
of four consecutive quarters, as reported on the FR Y-9C. The 
calculation will be effective on the as-of date of the fourth 
consecutive FR Y-9C.


Sec.  252.144  Annual stress test.

    (a) In general. A covered company must conduct an annual stress 
test by January 5 during each stress test cycle based on data as of 
September 30 of the preceding calendar year, unless the time or the as 
of date is extended by the Board in writing.
    (b) Scenarios provided by the Board. (1) In general. In conducting 
a stress test under this section, a covered company must use the 
scenarios provided by the Board. Except as provided in paragraphs 
(b)(2) and (3) of this section, the Board will provide a description of 
the scenarios to each covered company no later than November 15 of that 
calendar year.
    (2) Additional components. (i) The Board may require a covered 
company with significant trading activity, as determined by the Board 
and specified in the Capital Assessments and Stress Testing report (FR 
Y-14), to include a trading and counterparty component in its adverse 
and severely adverse scenarios in the stress test required by this 
section. The data used in this component will be as of a date between 
October 1 and December 1 of that calendar year selected by the Board, 
and the Board will communicate the as-of date and a description of the 
component to the company no later than December 1 of the calendar year.
    (ii) The Board may require a covered company to include one or more 
additional components in its adverse and severely adverse scenarios in 
the stress test required by this section based on the company's 
financial condition, size, complexity, risk profile, scope of 
operations, or activities, or risks to the U.S. economy.
    (3) Additional scenarios. The Board may require a covered company 
to use one or more additional scenarios in the stress test required by 
this section based on the company's financial condition, size, 
complexity, risk profile, scope of operations, or activities, or risks 
to the U.S. economy.
    (4) Notice and response. If the Board requires a covered company to 
include one or more additional components in its adverse and severely 
adverse scenarios under paragraph (b)(2)(ii) of this section or to use 
one or more additional scenarios under paragraph (b)(3) of this 
section, the Board will notify the company in writing no later than 
September 30. The notification will include a general description of 
the additional component(s) or additional scenario(s) and the basis for 
requiring the company to include the additional component(s) or 
additional scenario(s). Within 14 calendar days of receipt of a 
notification under this paragraph, the covered company may request in 
writing that the Board reconsider the requirement that the company 
include the additional component(s) or additional scenario(s), 
including an explanation as to why the reconsideration should be 
granted. The Board will respond in writing within 14 calendar days of 
receipt of the company's request. The Board will provide the covered 
company with a description of any additional component(s) or additional 
scenario(s) by December 1.


Sec.  252.145  Mid-cycle stress test.

    (a) Mid-cycle stress test requirement. In addition to the stress 
test required under section 252.144 of this subpart, a covered company 
must conduct a stress test by July 5 during each stress test cycle 
based on data as of March 31 of that calendar year, unless the time or 
the as-of date is extended by the Board in writing.
    (b) Scenarios related to mid-cycle stress tests--(1) In general. A 
covered company must develop and employ a minimum of three scenarios, 
including a baseline scenario, adverse scenario, and severely adverse 
scenario, that are appropriate for its own risk profile and operations, 
in conducting the stress test required by this section.
    (2) Additional components. The Board may require a covered company 
to include one or more additional components in its adverse and 
severely adverse scenarios in the stress test required by this section 
based on the company's financial condition, size, complexity, risk 
profile, scope of operations, or activities, or risks to the U.S. 
economy.
    (3) Additional scenarios. The Board may require a covered company 
to use one or more additional scenarios in the stress test required by 
this section based on the company's financial condition, size, 
complexity, risk profile, scope of operations, or activities, or risks 
to the U.S. economy.
    (4) Notice and response. If the Board requires a covered company to 
include one or more additional components in its adverse and severely 
adverse scenarios under paragraph (b)(2) of this section or one or more 
additional scenarios under paragraph (b)(3) of this section, the Board 
will notify the company in writing no later than March 31. The 
notification will include a general description of the additional 
component(s) or additional scenario(s) and the basis for requiring the 
company to include the additional component(s) or additional 
scenario(s). Within 14 calendar days of receipt of a notification under 
this paragraph, the covered company may request in writing that the 
Board reconsider the requirement that the company include the 
additional component(s) or additional scenario(s), including an 
explanation as to why the reconsideration should be granted. The Board 
will respond in writing within 14 calendar days of receipt of the 
company's request. The Board will provide the covered company with a 
description of any additional component(s) or additional scenario(s) by 
June 1.


Sec.  252.146  Methodologies and practices.

    (a) Potential impact on capital. In conducting a stress test under 
Sec. Sec.  252.144 and 252.145, for each quarter of the planning 
horizon, a covered company must estimate the following for each 
scenario required to be used:
    (1) Losses, pre-provision net revenue, provision for loan and lease 
losses, and net income; and
    (2) The potential impact on pro forma regulatory capital levels and 
pro forma capital ratios (including regulatory capital ratios, the tier 
1 common ratio, and any other capital ratios specified by the Board), 
incorporating the effects of any capital actions over the planning 
horizon and maintenance of an allowance for loan losses appropriate for 
credit exposures throughout the planning horizon.
    (b) Assumptions regarding capital actions. In conducting a stress 
test under Sec. Sec.  252.144 and 252.145, a covered company is 
required to make the following assumptions regarding its capital 
actions over the planning horizon--

[[Page 62395]]

    (1) For the first quarter of the planning horizon, the covered 
company must take into account its actual capital actions as of the end 
of that quarter; and
    (2) For each of the second through ninth quarters of the planning 
horizon, the covered company must include in the projections of 
capital:
    (i) Common stock dividends equal to the quarterly average dollar 
amount of common stock dividends that the company paid in the previous 
year (that is, the first quarter of the planning horizon and the 
preceding three calendar quarters);
    (ii) Payments on any other instrument that is eligible for 
inclusion in the numerator of a regulatory capital ratio equal to the 
stated dividend, interest, or principal due on such instrument during 
the quarter; and
    (iii) An assumption of no redemption or repurchase of any capital 
instrument that is eligible for inclusion in the numerator of a 
regulatory capital ratio.
    (c) Controls and oversight of stress testing processes--(1) In 
general. The senior management of a covered company must establish and 
maintain a system of controls, oversight, and documentation, including 
policies and procedures, that are designed to ensure that its stress 
testing processes are effective in meeting the requirements in this 
subpart. These policies and procedures must, at a minimum, describe the 
covered company's stress testing practices and methodologies, and 
processes for validating and updating the company's stress test 
practices and methodologies consistent with applicable laws, 
regulations, and supervisory guidance. Policies of covered companies 
must also describe processes for scenario development for the mid-cycle 
stress test required under Sec.  252.145.
    (2) Oversight of stress testing processes. The board of directors, 
or a committee thereof, of a covered company must approve and review 
the policies and procedures of the stress testing processes as 
frequently as economic conditions or the condition of the covered 
company may warrant, but no less than annually. The board of directors 
and senior management of the covered company must receive a summary of 
the results of any stress test conducted under this subpart.
    (3) Role of stress testing results. The board of directors and 
senior management of each covered company must consider the results of 
the analysis it conducts under this subpart, as appropriate:
    (i) As part of the covered company's capital plan and capital 
planning process, including when making changes to the covered 
company's capital structure (including the level and composition of 
capital);
    (ii) When assessing the covered company's exposures, 
concentrations, and risk positions; and
    (iii) In the development or implementation of any plans of the 
covered company for recovery or resolution.


Sec.  252.147  Reports of stress test results.

    (a) Reports to the Board of stress test results. (1) A covered 
company must report the results of the stress test required under 
section 252.144 to the Board by January 5 of each calendar year in the 
manner and form prescribed by the Board, unless that time is extended 
by the Board in writing.
    (2) A covered company must report the results of the stress test 
required under section 252.145 to the Board by July 5 of each calendar 
year in the manner and form prescribed by the Board, unless that time 
is extended by the Board in writing.
    (b) Confidential treatment of information submitted. The 
confidentiality of information submitted to the Board under this 
subpart and related materials shall be determined in accordance with 
applicable exemptions under the Freedom of Information Act (5 U.S.C. 
552(b)) and the Board's Rules Regarding Availability of Information (12 
CFR part 261).


Sec.  252.148  Disclosure of stress test results.

    (a) Public disclosure of results--(1) In general. (i) A covered 
company must disclose a summary of the results of the stress test 
required under section 252.144 in the period beginning on March 15 and 
ending on March 31, unless that time is extended by the Board in 
writing.
    (ii) A covered company must disclose a summary of the results of 
the stress test required under section 252.145 in the period beginning 
on September 15 and ending on September 30, unless that time is 
extended by the Board in writing.
    (2) Disclosure method. The summary required under this section may 
be disclosed on the Web site of a covered company, or in any other 
forum that is reasonably accessible to the public.
    (b) Summary of results. A covered company must disclose, at a 
minimum, the following information regarding the severely adverse 
scenario:
    (1) A description of the types of risks included in the stress 
test;
    (2) A general description of the methodologies used in the stress 
test, including those employed to estimate losses, revenues, provision 
for loan and lease losses, and changes in capital positions over the 
planning horizon;
    (3) Estimates of--
    (i) Pre-provision net revenue and other revenue;
    (ii) Provision for loan and lease losses, realized losses or gains 
on available-for-sale and held-to-maturity securities, trading and 
counterparty losses, and other losses or gains;
    (iii) Net income before taxes;
    (iv) Loan losses (dollar amount and as a percentage of average 
portfolio balance) in the aggregate and by subportfolio, including: 
domestic closed-end first-lien mortgages; domestic junior lien 
mortgages and home equity lines of credit; commercial and industrial 
loans; commercial real estate loans; credit card exposures; other 
consumer loans; and all other loans; and
    (v) Pro forma regulatory capital ratios and the tier 1 common ratio 
and any other capital ratios specified by the Board;
    (4) An explanation of the most significant causes for the changes 
in regulatory capital ratios and the tier 1 common ratio; and
    (5) With respect to a stress test conducted pursuant to section 
165(i)(2) of the Dodd-Frank Act by an insured depository institution 
that is a subsidiary of the covered company and that is required to 
disclose a summary of its stress tests results under applicable 
regulations, changes in regulatory capital ratios and any other capital 
ratios specified by the Board of the depository institution subsidiary 
over the planning horizon, including an explanation of the most 
significant causes for the changes in regulatory capital ratios.
    (c) Content of results. (1) The following disclosures required 
under paragraph (b) of this section must be on a cumulative basis over 
the planning horizon:
    (i) Pre-provision net revenue and other revenue;
    (ii) Provision for loan and lease losses, realized losses/gains on 
available-for-sale and held-to-maturity securities, trading and 
counterparty losses, and other losses or gains;
    (iii) Net income before taxes; and
    (iv) Loan losses in the aggregate and by subportfolio.
    (2) The disclosure of pro forma regulatory capital ratios, the tier 
1 common ratio, and any other capital ratios specified by the Board 
that is required under paragraph (b) of this section must include the 
beginning value, ending value, and minimum value of each ratio over the 
planning horizon.

[[Page 62396]]

Subpart H [Reserved]

Subpart I [Reserved]

    By order of the Board of Governors of the Federal Reserve 
System, October 5, 2012.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2012-24987 Filed 10-11-12; 8:45 am]
BILLING CODE 6210-01-P