[Federal Register Volume 77, Number 224 (Tuesday, November 20, 2012)]
[Rules and Regulations]
[Pages 69553-69556]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28104]



========================================================================
Rules and Regulations
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents 
having general applicability and legal effect, most of which are keyed 
to and codified in the Code of Federal Regulations, which is published 
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 
Prices of new books are listed in the first FEDERAL REGISTER issue of each 
week.

========================================================================


Federal Register / Vol. 77, No. 224 / Tuesday, November 20, 2012 / 
Rules and Regulations

[[Page 69553]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325


Policy Statement on the Principles for Development and 
Distribution of Annual Stress Test Scenarios

AGENCY: Federal Deposit Insurance Corporation (``FDIC'' or 
``Corporation'').

ACTION: Interim guidance with request for public comment.

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

SUMMARY: This interim guidance sets forth the general processes and 
factors to be used by the FDIC in developing and distributing the 
stress test scenarios for the annual stress tests 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 15, 2012.\1\ Under the Stress Test Rule FDIC-
insured state nonmember banks and FDIC-insured state-chartered savings 
associations with total consolidated assets of more than $10 billion 
are required to conduct annual stress tests using a minimum of three 
scenarios (baseline, adverse and severely adverse) provided by the 
FDIC. The Stress Test Rule specified that the FDIC will provide the 
required scenarios to the covered banks no later than November 15th of 
each year.
---------------------------------------------------------------------------

    \1\ 77 FR 62417 (Oct. 15, 2012).

DATES: This interim guidance is effective November 20, 2012. Comments 
---------------------------------------------------------------------------
must be submitted on or before January 22, 2013.

ADDRESSES: You may submit comments by any of the following methods:
     Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html. Follow the instructions for submitting comments.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: comments@FDIC.gov. Include ``Policy Statement on 
the Principles for Development and Distribution of Annual Stress Test 
Scenarios'' in the subject line of the message. Comments received will 
be posted without change to http://www.FDIC.gov/regulations/laws/federal/propose.html, including any personal information provided.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street NW., Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street), on business days 
between 7:00 a.m. and 5:00 p.m. (EDT).
    Instructions: Please use the title ``Policy Statement on the 
Principles for Development and Distribution of Annual Stress Test 
Scenarios'' to facilitate the organization and distribution of the 
comments.

FOR FURTHER INFORMATION CONTACT: George French, Deputy Director, 
Policy, (202) 898-3929, Robert Burns, Associate Director, Mid-Tier Bank 
Branch, (202) 898-3905, or Ryan Sheller, Senior Large Financial 
Institutions Specialist, (202) 412-4861, Division of Risk Management 
and Supervision; Philip A. Shively, Chief, Economic Analysis Section, 
(202) 898-6790, Division of Insurance and Research; Mark G. Flanigan, 
Counsel, (202) 898-7426, Rachel Jones, Attorney, (202) 898-6858, or 
Grace Pyun, Attorney, (202) 898-3609, Legal Division, Federal Deposit 
Insurance Corporation, 550 17th Street NW., Washington, DC 20429.

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 
FDIC-insured state nonmember banks and FDIC-insured state-chartered 
savings associations with total consolidated assets of more than $10 
billion (``covered banks''), to conduct annual stress tests. The FDIC 
published in the Federal Register on October 15, 2012 (77 FR 62417), 
the Stress Test Rule implementing the requirements and setting out 
definitions and rules for scope of application, scenarios, reporting, 
and disclosure. Under the Stress Test Rule, covered banks are required 
to conduct annual stress tests based on the annual stress test cycle 
set out in Table 1.

                 Process Overview of Annual Stress Test
                    [Using data as of September 30th]
------------------------------------------------------------------------
                                                       Timeframe for $10
                                  Timeframe for over    billion to $50
              Step                    $50 billion       billion covered
                                     covered banks           banks
------------------------------------------------------------------------
1. FDIC provides covered banks    No later than       No later than
 with scenarios for annual         November 15th.      November 15th.
 stress tests.
2. Covered banks submit required  No later than       No later than
 regulatory reports to the FDIC    January 5th.        March 31st.\2\
 on their stress tests.
3. Covered banks make required    Between March 15th  Between June 15th
 public disclosures.               and March 31st.     and June 30th.
------------------------------------------------------------------------

    A key component of the annual stress test is the development of the 
stress test scenarios that are provided to covered banks on or before 
November 15th of each year. Scenarios are those sets of conditions that 
affect the U.S. economy or the financial condition of a covered bank 
that the FDIC annually determines are appropriate for use in the stress

[[Page 69554]]

tests, including, but not limited to, baseline, adverse, and severely 
adverse scenarios. 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 FDIC annually will 
determine scenarios that are appropriate for use for each annual stress 
test. The timeline in Table 1 provides that the FDIC will distribute 
stress test scenarios to covered banks no later than November 15th of 
each year. This document articulates the principles that the FDIC will 
apply to develop and distribute those scenarios for covered banks.
---------------------------------------------------------------------------

    \2\ A covered bank subsidiary may elect to report and issue its 
required public disclosure on its parent bank holding company's or 
savings and loan holding company's timeline.
---------------------------------------------------------------------------

II. Immediate Effective Date and Request for Comment

    This interim guidance is effective November 20, 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 supervision and is essential 
for the health of covered banks and the overall financial stability of 
the economy.\3\ For this reason, FDIC believed that it was necessary 
for certain FDIC-insured state nonmember banks and FDIC-insured state-
chartered savings associations with total consolidated assets not less 
than $50 billion to conduct stress tests under the Stress Test Rule 
this year. 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 bank'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 bank. Moreover, 
the FDIC believes that the stress tests will benefit the covered banks 
by supporting their own forward-looking assessments of their risks and 
better equip them to address a range of adverse outcomes. Similarly, 
the FDIC believes that it is necessary to make this interim guidance 
effective immediately. While the FDIC 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, the 
FDIC believes that it is important to give covered banks a sense of the 
general processes and factors used for scenario development that the 
FDIC expects to use going forward, and an opportunity to comment.
---------------------------------------------------------------------------

    \3\ See id., at 62423.
---------------------------------------------------------------------------

    The FDIC 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 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 A.1), the FDIC has reviewed 
this interim guidance. The FDIC 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 FDIC has conducted a PRA analysis on all related 
reporting, recordkeeping and disclosure requirements in the Stress Test 
Rule and submitted them to OMB for review and approval. The request, 
which has been assigned OMB Control No. 3064-0187, is still pending. No 
new collection of information pursuant to the PRA is contained in this 
interim guidance.

IV. Principles for Development and Distribution of Annual Stress Test 
Scenarios

    The text of the interim policy statement 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 
FDIC-insured state nonmember banks and FDIC-insured state-chartered 
savings associations with total consolidated assets of more than $10 
billion (``covered banks''), to conduct annual stress tests. The 
Federal Deposit Insurance Corporation (``FDIC'' or ``Corporation'') 
published in the Federal Register on October 15, 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 FDIC will 
distribute stress test scenarios to covered banks. This document 
articulates the principles that the FDIC will apply to develop and 
distribute those scenarios for covered banks.
---------------------------------------------------------------------------

    \1\ 77 FR 62417 (Oct. 15, 2012).
---------------------------------------------------------------------------

II. Stress Tests

    As defined by the Stress Test Rule, a stress test means ``the 
process to assess the potential impact of scenarios on the consolidated 
earnings, losses, and capital of a covered bank over the planning 
horizon, taking into account the current condition of the covered bank 
and the covered bank's risks, exposures, strategies, and activities.'' 
\2\ Stress tests help covered banks and the FDIC determine whether 
those banks have capital sufficient to absorb losses that could result 
from adverse economic conditions. The FDIC 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 FDIC uses for 
these purposes; a complete assessment of a covered bank'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 FDIC expects the 
board of directors and senior management of each covered bank to 
consider the results of the annual stress test when conducting capital 
planning, assessing capital adequacy, and evaluating risk management 
practices.\3\ The FDIC also may use stress test results to determine 
whether additional analytical techniques and exercises are appropriate 
for a covered bank to employ in identifying, measuring, and monitoring 
risks to the financial soundness of the covered bank.
---------------------------------------------------------------------------

    \2\ 12 CFR 325.202(l).
    \3\ Id. at 325.205(b)(3).
---------------------------------------------------------------------------

    Under the Stress Test Rule, each covered bank is required to 
conduct an annual stress test using its financial data as of September 
30th of each year, unless the FDIC requires a different ``as of'' date 
for any or all categories of financial data.\4\ The stress test must 
assess the potential impact of specific scenarios on the regulatory 
capital of the covered bank and on certain related items over a 
forward-looking planning horizon, taking into account all relevant 
exposures and activities.\5\ Under the Stress Test 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.
---------------------------------------------------------------------------

    \4\ Id. at 325.201(c)(2) and 325.203(a).
    \5\ Id. at 325.205(a).

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

[[Page 69555]]

III. Scenarios

    Scenarios are those sets of conditions that affect the U.S. economy 
or the financial condition of a covered bank that the Corporation 
annually determines are appropriate for use in the stress tests, 
including, but not limited to, baseline, adverse, and severely adverse 
scenarios.\6\ The FDIC 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 bank must use the 
scenarios provided by the FDIC.
---------------------------------------------------------------------------

    \6\ Id. at 325.202(i).
---------------------------------------------------------------------------

    Each scenario includes the values of the variables specified for 
each quarter over the stress test horizon. The FDIC expects that 
covered banks 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 FDIC 
provides. The FDIC 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 include, but are not be limited 
to, the growth rate of gross domestic product, the unemployment rate, 
and the inflation rate. The FDIC anticipates that the path of the 
unemployment rate 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 FDIC expects to specify 
scenarios using a standard core set of variables, although variables 
may be added or deleted as the U.S. and global economic environment 
evolves. The FDIC will attempt to minimize additions, redefinitions, or 
re-specifications of the stress test variables from year to year, as 
the use of such new or different variables may potentially require 
covered banks to modify their testing systems.
    The scenarios provided by the FDIC 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 banks as well as their capital planning processes. 
The aim is to assess the covered banks' ability to identify and measure 
the risks they face under adverse conditions, and to ensure that 
appropriate amounts of capital exist to support those risks. The FDIC 
will evaluate both the adequacy of the projections and the processes 
used in the stress test. The FDIC expects covered banks 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 means a set of conditions that affect the 
U.S. economy or the financial condition of a covered bank, and that 
reflect the consensus views of the economic and financial outlook.\7\ 
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 FDIC may choose to depart from the 
consensus if necessary to provide a more appropriate baseline for the 
stress tests.
---------------------------------------------------------------------------

    \7\ Id. at 325.202(c).
---------------------------------------------------------------------------

    The adverse scenario means a set of conditions that affect the U.S. 
economy or the financial condition of a covered bank that are more 
adverse than those associated with the baseline scenario and may 
include trading or other additional components.\8\ The adverse scenario 
may also be used to investigate other risks, such as including 
operational risks that the FDIC believes should be better understood or 
more closely monitored.
---------------------------------------------------------------------------

    \8\ Id. at 325.202(a).
---------------------------------------------------------------------------

    The severely adverse scenario means a set of conditions that affect 
the U.S. economy or the financial condition of a covered bank and that 
overall are more severe than those associated with the adverse scenario 
and may include trading or other additional components.\9\ 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:
---------------------------------------------------------------------------

    \9\ Id. at 325.202(j).
---------------------------------------------------------------------------

     The 1973-75 recession, during which the unemployment rate 
increased 4.1 percentage points, from 4.9 percent in third quarter 1973 
to 9.0 percent in second quarter 1975 (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 fourth quarter 1979 to 10.8 percent in fourth quarter 1982 
(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 third quarter 2007 
to 10.0 percent in fourth quarter 2009 (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 FDIC for the stress tests cover at 
least nine quarters. In addition, the FDIC 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 banks to determine adequate levels of loan loss reserves.
    The FDIC believes that as a general matter all covered banks should 
use the same set of scenarios and planning horizon so that the FDIC can 
better compare results across institutions. To that end, the FDIC 
intends to provide one set of scenarios for use by all covered banks. 
However, the FDIC 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 FDIC reserves the authority to require a covered bank to use 
different or additional scenarios and/or planning horizons the 
Corporation may deem appropriate.\10\ For example, a covered bank 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 banks. The FDIC expects such situations to be 
rare

[[Page 69556]]

and anticipates making every effort to distribute the same scenarios to 
all covered banks.
---------------------------------------------------------------------------

    \10\ Id. at 325.201(c).
---------------------------------------------------------------------------

    In addition to the minimum three scenarios, the FDIC may require a 
covered bank 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 FDIC 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 FDIC will use the information gathered in this manner to 
inform its consideration of potential risks and scenarios.
    The Office of the Comptroller of the Currency (``OCC''), the Board 
of Governors of the Federal Reserve System (``Board''), and the FDIC 
(collectively, the ``Agencies'') expect to consult closely to develop 
scenarios for stress testing. Absent specific supervisory concerns, the 
FDIC anticipates that the annual stress test scenarios distributed by 
the FDIC 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.
    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 banks 
for the annual stress test. The FDIC may distribute scenarios to 
covered banks that differ in certain respects from those distributed by 
the OCC and the Board if necessary to better reflect specific FDIC 
concerns. The FDIC expects such situations to be extremely rare, 
however, and anticipates making every effort to avoid differences in 
the scenarios required by each agency.
    The FDIC 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 OCC, as well as the ongoing 
interaction of FDIC 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 banks no later than November 15th of 
each year. The scenario descriptions provided to covered banks will 
include values for economic and financial variables depicting the paths 
those variables follow under the scenarios. The FDIC believes that 
distribution of the scenarios no later than November 15th aligns with 
similar processes at the OCC and the Board.

Federal Deposit Insurance Corporation.

    Dated at Washington, DC, this 14th day of November 2012.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2012-28104 Filed 11-19-12; 8:45 am]
BILLING CODE 6714-01-P