[Federal Register Volume 77, Number 221 (Thursday, November 15, 2012)]
[Rules and Regulations]
[Pages 68047-68050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27660]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 77, No. 221 / Thursday, November 15, 2012 /
Rules and Regulations
[[Page 68047]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 46
[Docket No. OCC-2012-0016]
Policy Statement on the Principles for Development and
Distribution of Annual Stress Test Scenarios
AGENCY: Office of the Comptroller of the Currency (OCC), Treasury.
ACTION: Interim guidance with request for public comment.
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SUMMARY: This interim guidance sets forth the general processes and
factors to be used by the OCC in development and distributing the
stress test scenarios for the annual stress test required by the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010 as
implemented by the Annual Stress Test final rule (Stress Test Rule)
published on October 9, 2012. Under the Stress Test Rule national banks
and Federal savings associations with total consolidated assets of more
than $10 billion (covered institutions) are required to conduct annual
stress tests using a minimum of three scenarios (baseline, adverse and
severely adverse) provided by the OCC. The Stress Test Rule specified
that the OCC will provide the required scenarios to the covered
institutions by November 15th of each year.
DATES: This interim guidance is effective November 15, 2012. Comments
must be submitted on or before January 14, 2013.
ADDRESSES: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by
email if possible. Please use the title ``Policy Statement on
Principles for Development and Distribution of Annual Stress Test
Scenarios'' to facilitate the organization and distribution of the
comments. You may submit comments by any of the following methods:
Email: [email protected].
Mail: Office of the Comptroller of the Currency, 250 E
Street SW., Mail Stop 2-3, Washington, DC 20219.
Fax: (202) 874-5274.
Hand Delivery/Courier: 250 E Street SW., Mail Stop 2-3,
Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name
and ``Docket Number OCC-2012-0016'' in your comment. In general, OCC
will enter all comments received into the docket and publish them on
the Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this notice by any of the following methods:
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 250 E Street SW., Washington, DC
20219. For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid
government-issued photo identification and to submit to security
screening in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
FOR FURTHER INFORMATION CONTACT: David Nebhut, Deputy Comptroller for
Economic and Policy Analysis, Economic and Policy Analysis (202) 649-
5472, Arthur McMahon, Director, International Analysis and Banking
Conditions (202) 649-5475, Robert Scavotto, Lead International Expert,
International Analysis and Banking Condition (202) 649-5477, Henry
Barkhausen, Attorney, Legislative and Regulatory Activities Division
(202) 874-5090, or Ron Shimabukuro, Senior Counsel, Legislative and
Regulatory Activities Division (202) 874-5090, Office of the
Comptroller of the Currency, 250 E Street SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
I. Background
Section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 requires certain financial companies, including
national banks and Federal savings associations with total consolidated
assets of more than $10 billion (covered institutions), to conduct
annual stress tests. The OCC published in the Federal Register on
October 9, 2012, the final Annual Stress Test rule \1\ implementing the
requirements and setting out definitions and rules for scope of
application, scenarios, reporting, and disclosure. Under the Stress
Test Rule, covered institutions are required to conduct annual stress
tests based on the annual stress test cycle set out in Table 1.
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\1\ 77 FR 61238 (October 9, 2012).
Table 1--Process Overview of Annual Stress Test Cycles for Covered
Institutions
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Key step Over $50 billion $10 to $50 billion
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1. OCC distributes scenarios for By November 15.... By November 15.
annual stress tests.
[[Page 68048]]
2. Covered institutions conduct By January 5...... By March 31.
annual stress test and submit
Annual Stress Test Report to
the OCC and the Board.
3. Covered institutions make Between March 15 Between June 15
required public disclosures. and March 31. and June 30.
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A key component of the annual stress test is the stress test
scenarios. Scenarios are sets of conditions that affect the U.S.
economy or the financial condition of covered institutions. Each
scenario includes the values of the variables specified for each
quarter over the stress test horizon. The variables specified for each
scenario generally address economic activity, asset prices, and other
measures of financial market conditions for the United States and key
foreign countries. The OCC annually will determine scenarios that are
appropriate for use for each annual stress test. The timeline in Table
1 provides that the OCC will distribute stress test scenarios to
covered institutions by November 15th of each year. This document
articulates the principles that the OCC will apply to develop and
distribute those scenarios for covered institutions.
II. Immediate Effective Date and Request for Comment
This interim guidance is effective November 15, 2012 and
applicable, to the extent practicable, to the annual stress test cycle
beginning this year. As explained in the preamble, the Stress Test Rule
was effective immediately upon publication because the stress testing
framework represents a critical tool for national bank supervision and
is essential for the health of covered institutions and the overall
financial stability of the economy.\2\ For this reason, OCC believed
that it was necessary for certain national banks and Federal savings
associations with consolidated assets of $50 billion or more to conduct
stress tests under the Stress Test Rule this year.
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\2\ See Id. at 61244.
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The stress tests conducted under the Stress Test Rule framework
will provide important forward-looking information to supervisors to
assist in the overall assessment of a covered institution's capital
adequacy and will help determine whether additional analytical
techniques and exercises are appropriate to identify, measure and
monitor risk to the financial soundness of the covered institution.
Moreover, the OCC believes that the stress tests will benefit the
covered institutions by supporting their own forward-looking
assessments of their risks and better equip them to address a range of
adverse outcomes. Similarly, the OCC believes that it is necessary to
make this interim guidance effective immediately. The OCC recognizes
that because of timing issues many of the procedural aspects of this
interim guidance will not be relevant for the development of the
scenarios for this year, however, the OCC believes that it is important
to give covered institutions a sense of the general processes and
factors used for scenario development that the OCC expects to use going
forward, as well as an opportunity to comment.
The agency solicits comment on all aspects of the interim guidance.
Specifically, what challenges, if any, exist in applying this guidance
generally or at particular banking organizations and why? Are there any
terms described by the interim guidance that require further
clarification and how should they be defined?
III. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320, Appendix A1, the OCC reviewed the interim
guidance. The OCC may not conduct or sponsor, and an organization is
not required to respond to, an information collection unless the
information collection displays a currently valid OMB control number.
The interim guidance contains no new collections of information under
the PRA beyond those contained in OMB Control No. 1557-0311, the
collection covering the Annual Stress Test rulemaking.
IV. Principles for Development and Distribution of Annual Stress Test
Scenarios
The text of the proposed guidance is as follows.
PRINCIPLES FOR DEVELOPMENT AND DISTRIBUTION OF STRESS TEST SCENARIOS
I. INTRODUCTION
Section 165(i)(2) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 requires certain financial
companies, including national banks and Federal savings associations
with total consolidated assets of more than $10 billion (covered
institutions), to conduct annual stress tests. The Office of the
Comptroller of the Currency (OCC) published in the Federal Register
on October 9, 2012, a final rule (stress test rule) implementing the
requirements and setting out definitions and rules for scope of
application, scenarios, reporting, and disclosure.\1\ Under the
stress test rule, each year the OCC will distribute stress test
scenarios to covered institutions. This document articulates the
principles that the OCC will apply to develop and distribute those
scenarios for covered institutions.
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\1\ Annual Stress Test, 77 FR 61238 (October 9, 2012).
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II. STRESS TESTS
As defined by the stress test rule, a stress test is ``a process
to assess the potential impact of stressful scenarios on the
consolidated earnings, losses, and capital of a covered institution
over the planning horizon, taking into account the covered
institution's current condition, risks, exposures, strategies, and
activities.'' \2\
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\2\ 12 CFR 46.2 (Definition of Stress Test).
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Stress tests help covered institutions and the OCC determine
whether those institutions have capital sufficient to absorb losses
that could result from adverse economic conditions. The OCC views
stress test results as one source of forward-looking information
that can help identify downside risks and assess the potential
impact of adverse outcomes on capital adequacy. Stress tests are not
the only tool the OCC uses for these purposes; a complete assessment
of a covered institution's capital position typically includes
review of its capital planning processes, the governance concerning
those processes, and the adequacy of capital under established
regulatory capital measures. The OCC expects the board of directors
and senior management of each covered institution to consider the
results of the annual stress test when conducting capital planning,
assessing capital adequacy, and evaluating risk management
practices. The OCC also may use stress test results to determine
whether additional analytical techniques and exercises are
appropriate for a covered institution to employ in identifying,
measuring, and monitoring risks to the financial soundness of the
covered institution.
Under the final rule, each covered institution is required to
conduct an annual stress test using its financial data as of
September 30 of each year, unless the OCC requires a different ``as
of'' date for any or all categories of financial data. The stress
test
[[Page 68049]]
must assess the potential impact of specific scenarios on the
regulatory capital of the covered institution and on certain related
items over a forward-looking planning horizon, taking into account
all relevant exposures and activities.\3\ Under the final rule, the
planning horizon is at least nine quarters, consisting of the fourth
quarter of the current calendar year plus all four quarters of each
of the two subsequent calendar years.
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\3\ Id. at 46.6(a).
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III. SCENARIOS
Scenarios are sets of conditions that affect the U.S. economy or
the financial condition of covered institutions.\4\ The OCC annually
will determine scenarios that are appropriate for use under the
stress test rule. In conducting the stress test under the stress
test rule, each covered institution must use the scenarios provided
by the OCC.
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\4\ Id. at 46.2 (Definition of scenarios).
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Each scenario includes the values of the variables specified for
each quarter over the stress test horizon. The OCC expects that
covered institutions may not need to use all of the variables
provided and may need to estimate relationships to identify other
variables, such as those reflecting local economic conditions, from
the values the OCC provides. The OCC will review the appropriateness
of estimation processes and resulting estimates, or other
modifications of variables, through its ongoing supervisory
processes.
The variables specified for each scenario generally address
economic activity, asset prices, and other measures of financial
market conditions for the United States and key foreign countries.
Variables that describe economic activity likely will include, but
not be limited to, the growth rate of gross domestic product, the
unemployment rate, and the inflation rate. The OCC anticipates that
the path (which reflects the level and rate of change) of the
unemployment rate during the planning horizon in particular will be
a key variable indicating the severity of economic stress, as this
variable provides a simple and widely noted gauge of the state of
the U.S. economy. This point is discussed further in this statement
in connection with severely adverse scenarios.
Other variables may represent asset prices and financial market
conditions, including interest rates. The OCC expects to specify
scenarios using a fairly stable core set of variables, although
variables may be added or deleted as the U.S. and global economic
environment evolves. The OCC will attempt to minimize additions,
redefinitions, or re-specifications from year to year, recognizing
that the use of new or modified variables for stress tests may
require potentially costly systems changes at covered institutions.
The scenarios provided by the OCC reflect at least three sets of
economic and financial conditions, described in the rule as
baseline, adverse, and severely adverse. The baseline broadly
corresponds to the set of conditions expected to prevail over the
term of the stress tests. The adverse and severely adverse scenarios
introduce hypothetical stress conditions intended to test the safety
and soundness of covered institutions as well as their capital
planning processes. The aim is to assess the covered institutions'
ability to identify and measure the risks it faces under adverse
conditions, and to ensure that appropriate amounts of capital exist
to support those risks. The OCC will evaluate both the adequacy of
the projections and the processes used in the company-run stress
test. The OCC expects covered institutions to be able to maintain
ready access to funding, continue operations, meet obligations to
creditors and counterparties, and continue to serve as credit
intermediaries under conditions that are significantly more adverse
than expected.
The baseline scenario establishes a benchmark set of conditions
that incorporates the most current views on the macroeconomic
outlook. These views are based on information obtained from
government agencies, other public sector organizations, and private
sector forecasters as close to the date of the annual stress test as
possible. The baseline may be based on one or more of the
``consensus'' forecasts produced by various organizations, although
the OCC may choose to depart from the consensus if necessary to
provide a more appropriate baseline for the stress tests.
The adverse scenario is a hypothetical set of conditions
designed to simulate a moderate level of stress that covered
companies could experience, such as a mild-to-moderate U.S.
recession. The adverse scenario may also be used to investigate
other risks, perhaps including operational risks, that the OCC
believes should be better understood or more closely monitored.
The severely adverse scenario is a set of quite challenging
economic and financial conditions, such as those that might be
experienced in a relatively severe recession. Three examples of
severe recessions from recent U.S. experience may illustrate the
anticipated depth of the severely adverse scenario as it relates to
the unemployment rate:
The 1973-75 recession, during which the unemployment
rate increased 4.1 percentage points, from 4.9 percent in 1973Q3 to
9.0 percent in 1975Q2 (one quarter after the recession ended).
The back-to-back recessions in 1980 and 1981-82, during
which the unemployment rate increased 4.7 percentage points, from
6.1 percent in 1979Q4 to 10.8 percent in 1982Q4 (the last quarter of
the recession).
The 2007-09 recession, during which the unemployment
rate increased 5.3 percentage points, from 4.7 percent in 2007Q3 to
10.0 percent in 2009Q4 (two quarters after the recession ended).
Other variables under the adverse and severely adverse scenarios
would be expected to follow paths consistent with the depth and
duration of previous recessions and with models of macroeconomic
activity. The severely adverse scenario also may reflect other risks
that are especially salient and that might not be captured by past
recessions, including elevated levels of systemic risk.
The scenarios distributed by the OCC for the stress tests cover
at least nine quarters. In addition, the OCC will generally publish
scenarios that cover one year beyond the planning horizon of the
stress test, to allow for the estimation of loan losses for the year
following the stress planning horizon; this additional specification
allows covered institutions to determine adequate levels of loan
loss reserves.
The OCC believes that as a general matter all covered
institutions should use the same set of scenarios and planning
horizon so that the OCC can better compare results across
institutions. To that end, the OCC intends to provide one set of
scenarios for use by all covered institutions. However, the OCC
believes there may be circumstances that would warrant the use of
different or additional scenarios or a planning horizon of more than
nine quarters. Thus, under the stress test rule the OCC reserves the
authority to require a covered institution to use different or
additional scenarios and/or planning horizons the agency may deem
appropriate. For example, a covered institution may conduct business
activities or have risk exposures that would encounter stress under
conditions that differ materially from those that would generate
stress for other institutions. The OCC expects such situations to be
rare and anticipates making every effort to distribute the same
scenarios to all covered institutions.
In addition to the minimum three scenarios, the OCC may require
a covered institution with significant trading activities to include
factors related to trading and counterparty risk in its stress test.
Typically, these factors might include additional shocks to specific
market prices, interest rates, rate spreads, or other key market
variables consistent with historical or hypothetical adverse market
events.
IV. DEVELOPMENT AND DISTRIBUTION
As one part of the process of developing scenarios, the OCC will
gather information from outside entities and develop themes for the
stress test scenarios, including the identification of potentially
material vulnerabilities or salient risks to the financial system,
and consider potential paths for individual variables. The outside
entities may include academic experts, staffs of international
organizations, foreign supervisors, financial institutions that
regularly provide forecasts, and other private sector risk analysts
that regularly conduct stress tests based on U.S. and global
economic and financial scenarios. The OCC will use the information
gathered in this manner to inform its consideration of potential
risks and scenarios.
The OCC, the Board of Governors of the Federal Reserve System
(Board), and the Federal Deposit Insurance Corporation (FDIC)
(Agencies) expect to consult closely to develop scenarios for stress
testing. Absent specific supervisory concerns, the OCC anticipates
that the annual stress test scenarios distributed by the OCC will be
the same as or nearly identical to the scenarios developed by the
Board for the supervisory stress tests conducted by the Board under
Section 165(i)(1). This would mean the same economic and financial
variables following the same paths as used in the scenarios for the
Board's supervisory stress tests.
[[Page 68050]]
Although the Agencies generally expect to consult closely on
scenario development, they may have different views of risks that
should be reflected in the stress test scenarios used by covered
institutions for the annual stress test. The OCC may distribute
scenarios to covered institutions that differ in certain respects
from those distributed by the FDIC and the Board if necessary to
better reflect specific OCC concerns. The OCC expects such
situations to be extremely rare, however, and anticipates making
every effort to avoid differences in the scenarios required by each
agency.
The OCC anticipates that the stress test scenarios will be
revised annually as appropriate to ensure that each scenario remains
relevant under prevailing economic and industry conditions. These
yearly revisions will enable the scenarios to capture evolving risks
and vulnerabilities. The need to ensure that scenarios do not become
outdated because of economic and financial developments makes a
lengthy process of review and comment concerning scenarios prior to
distribution each year impractical. However, the process of
consultation with the Board and the FDIC, as well as the ongoing
interaction of OCC staff with public and private sector experts to
obtain views on salient risks and to obtain suggestions for the
behavior of key economic variables, should ensure that the stress
conditions reflected in the scenarios are well suited to their
purpose.
The scenario development process culminates with the
distribution of the scenarios to all covered institutions no later
than November 15 of each year. The scenario descriptions provided to
covered institutions will include values for economic and financial
variables depicting the paths those variables follow under the
scenarios. The OCC believes that distribution of the scenarios by
November 15 aligns with similar processes at the FDIC and the Board.
Dated: November 6, 2012.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2012-27660 Filed 11-14-12; 8:45 am]
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