Alert January 24, 2012

FDIC Proposes Rule Requiring Annual Stress Tests of State Nonmember Banks and FDIC-Supervised State Savings Associations with More Than $10 Billion in Assets

The FDIC has issued a notice of proposed rule making (the “Proposal”) that would require state nonmember banks and FDIC-supervised state savings associations with over $10 billion in assets to conduct annual stress tests, report the results to the FDIC, and make the results available to the public.  The proposal would implement section 165(i)(2) of the Dodd-Frank Act by imposing requirements substantively equivalent to the FRB regulation imposing stress tests on bank holding companies with over $50 billion in assets, issued in November 2011 and discussed in the December 6, 2011 Financial Services Alert.

The Proposal defines a stress test as a “process to assess the potential impact on a covered bank of economic and financial conditions on the consolidated earnings, losses and capital of the covered bank over a set planning horizon, taking into account the current condition of the covered bank and its risks, exposures, strategies, and activities.”  The FDIC noted that the Proposal focuses on capital adequacy, and not other aspects of financial condition, and that as of September 30, 2011, there were 23 state banks with assets exceeding $10 billion.

Under the Proposal, in November of each year, the FDIC would provide to each bank subject to the annual stress test requirement at least three scenarios, including baseline, adverse and severely adverse scenarios, that the bank must use to conduct its stress test.  The bank would then, using data as of September 30th of that year, assess the potential impact of each of the scenarios on the bank’s earnings, capital and other related items over the following nine quarters, considering all relevant exposures and activities.  The bank would be required to report its results to the FDIC by the following January 5th, including qualitative information describing the test, methodologies and assumptions employed and the types of risks assessed, and quantitative information such as pro forma capital levels and ratios, the estimated impact upon on certain financial measures and potential capital distributions over the nine quarter period.  The FDIC would then review the report, and recommend any changes to the bank’s capital structure that the FDIC deems appropriate.  Finally, the bank would be required to publish the results within 90 days of its report to the FDIC, and the Proposal states that publication on the bank’s website would be sufficient.

The FDIC is specifically requesting comments with respect to the anticipated costs of complying with the Proposal, the proposed method and contents of the public disclosure, any challenges to the proposed steps and time frames, specific alternatives that would fulfill the statutory requirement for stress tests and whether immediate effectiveness would provide a bank with sufficient time to prepare for its first stress test.  Comments on the Proposal are due March 17, 2012.