Alert August 13, 2013

FRB, FDIC and OCC Jointly Issue Proposed Supervisory Guidance on Implementing Stress Tests for Mid-Sized Banking Organizations

The FRB, FDIC and OCC (the “Agencies”) jointly issued proposed supervisory guidance (the “Proposed Guidance”) that describes high-level principles that should be used by mid-sized banking organizations to implement the stress tests such organizations are required to conduct under Section 165(i)(2) of the Dodd-Frank Act.  Mid-sized banking organizations are defined as all bank and savings and loan holding companies, national banks, state member banks, state non-member banks, federal savings associations, and state chartered savings associations with more than $10 billion but less than $50 billion in total consolidated assets (“Mid-Sized Banking Organizations”).  In the Proposed Guidance, the Agencies emphasize the importance of stress testing to Mid-Sized Banking Organizations as an ongoing risk management practice “that supports a company’s forward-looking assessment of its risks and better equips the company to address a range of  macroeconomic and financial outcomes.”

The Proposed Guidance describes the Agencies’ supervisory expectations of Mid-Sized Banking Organizations and the methodologies that such companies should use in conducting annual stress tests.

Under the Dodd-Frank Act rules Mid-Sized Banking Organizations must assess the potential impact of a minimum of three macroeconomic scenarios:  (1) baseline, (2) adverse and (3) severely adverse on the Mid-Sized Banking Organization’s consolidated losses, revenues, balance sheet (including risk-weighted assets) and capital.  The Proposed Guidance states that each scenario should be analyzed across all business lines and on the enterprise as a whole.  The Proposed Guidance makes it clear that Mid-Sized Banking Organizations are allowed flexibility in determining the methodologies they choose to use in conducting stress tests and that a Mid-Sized Banking Organization is expected to choose practices and methodologies that are appropriate for its risk profile, size, complexity, business risk, market foot-print and the materiality of specific portfolios of assets.  With respect to governance, controls, oversight and related documentation, the Proposed Guidance notes that the Agencies expect that Mid-Sized Banking Organizations will consider the results of stress testing in the respective company’s capital planning, assessment of capital adequacy, and risk management practices.

Comments on the Proposed Guidance are due to the OCC and the FDIC by September 25, 2013 and to the FRB by September 30, 2013.