The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have issued a request for comments on supervisory expectations for stress tests conducted by medium-sized financial companies. The agencies define “medium-sized” to be financial companies with total consolidated assets between $10 billion and $50 billion. Under rules the agencies issued in October 2012 to implement a provision in the Dodd-Frank Act, medium-sized companies must begin annual company-run stress testing beginning this fall. The proposed guidance issued on July 30, 2013 is intended to help these companies conduct stress tests and scale them appropriately to their size, complexity, risk profile, business mix, and market footprint.
The proposal addresses the following key areas:
- Supervisory scenarios
- Data sources and segmentation
- Loss estimation
- Pre-provision net revenue
- Balance sheet and risk-weighted assets projections
- Governance and controls
Before making these guidelines permanent, the agencies are seeking input from the industry in five areas:
Question 1: What challenges do companies expect in relating the national variables in thescenarios to regional and local market footprints?
Question 2: What additional clarity might be needed regarding the appropriate use of historical experience in the loss, revenue, balance sheet, and risk-weighted asset estimation process?
Question 3: What additional clarity should the guidance provide about the use of vendor or other third-party products and services that companies might choose to employ for DFA stress tests?
Question 4: How could the proposed guidance be clearer about the manner in which the required capital action assumptions between holding companies and banks differ, and how those different assumptions should be reconciled within a consolidated organization?
Question 5: What additional clarification would be helpful to companies about the responsibilities of their boards and senior management with regard to DFA stress tests?
Comments on this joint proposed guidance are due September 25, 2013.