Wednesday, November 28, 2012

Test Anxiety: Fed Issues Guidelines for 2013 Bank Stress Testing

On November 5, 2012, the Federal Reserve Board (the “Fed”) issued instructions and guidelines for two 2013 stress testing and capital planning programs. Based on similar programs instituted in 2012, the Comprehensive Capital Analysis and Review 2013 describes the processes for testing and development of capital plans that are required for the 19 bank holding companies ("BHCs")that participated in the Comprehensive Capital Analysis and Review in 2011 and 2012. The Capital Plan Review 2013 details the testing and capital planning requirements for the 11 BHCs with $50 billion or more in consolidated assets that undertook a similar exercise last year.

As outlined in the capital plan rule, the supervisory review of a BHC’s capital plan includes an assess­ment of

  • the comprehensiveness of the capital plan, including the suitability of the BHC scenarios, and the extent to which the risk measurement and other analysis underlying the plan capture and appropriately address potential risks stemming from alla activities across the BHC under baseline and stressed operating conditions; ­ 
  • the reasonableness of the BHC’s assumptions and analysis underlying the capital plan and a review of the robustness of the BHC’s capital adequacy process; 
  • the BHC’s capital policy; and 
  • the BHC’s ability to maintain capital above each minimum regulatory capital ratio and above a tier 1 common ratio of 5 percent on a pro forma basis under expected and stressful conditions throughout the planning horizon. 

Notably, as a part of the supervisory review of the capital plans, the Fed will also assess BHCs’ strategies for addressing proposed revisions to the regulatory capital framework agreed upon by the Basel Committee on Banking Supervision, commonly known as Basel III, and requirements arising from the Dodd-Frank Wall Street Reform and Consumer Protection Act.