Feds Issue “Stress Test” Guidance for Large Financial Institutions

In mid-May, the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) published final guidelines on mandatory stress tests at banks and other financial institutions with more than $10 billion in assets.

For your reference, a roundup of legal advisories on the new rules:

Agencies Finalize Stress Test Guidance For Banks With More Than $10 Billion in Assets; Guidance Not Applicable to Smaller Banks (Katten Muchin Rosenman LLP)

“The proposed guidance identified and included a discussion of four key principles for a banking organization’s stress testing framework and related stress test results, namely that: (i) a banking organization’s stress testing framework should include activities and exercises that are tailored to and sufficiently capture the banking organization’s exposures, activities, and risks; (ii) an effective stress testing framework employs multiple conceptually sound stress testing activities and approaches; (iii) an effective stress testing framework is forward-looking and flexible; and (iv) stress test results should be clear, actionable, well supported, and inform decision-making. In the final guidance, the agencies have incorporated a fifth principle specifying that an organization’s stress testing framework should include strong governance and effective internal controls.” Read the update>>

Banking Agencies Issue Joint Guidelines for Internal Stress Testing – Obligations for Small Institutions Remain Murky (Ballard Spahr LLP)

“The stress tests covered by the guidance are neither those conducted by the Federal Reserve to determine if large banks have enough capital to withstand financial and economic shocks nor those mandated by … the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Nor are they the supplementary stress tests described in a proposed Federal Reserve rulemaking dealing with enhanced prudential standards for large banking institutions and nonbank financial institutions of comparable significance. Rather, these guidelines are for internal stress tests conducted by the institutions themselves consistent with their individual businesses and risk profiles.” Read the update>>

Federal Prudential Regulators Issue Final Stress Test Guidance (BuckleySandler LLP)

“In a separate announcement, the banking regulators explicitly addressed concerns raised by community bankers by explaining that community banks are neither required nor expected to conduct the stress tests described above. However, the statement stresses that all banking organizations, regardless of size, should have the capacity to analyze the potential impact of adverse outcomes on their financial condition.” Read the update>>

Stress Test Lite – Here’s One for You! (Manatt, Phelps & Phillips, LLP)

“… we have observed that countless community banks are indeed adopting variations of portfolio, liquidity and capital stress testing. Further, state and federal examiners encourage targeted stress testing of sensitive or concentrated risks at a minimum. In a companion Joint Press Release announcing their final large bank stress guidance, the regulatory agencies clearly stated their view of the importance of stress testing by all banks… In our view, the question is not whether community banks will adopt enterprise-wide stress testing as a prudent best practice, but rather when, at what cost and with what practical results?” Read the update>>

Financial Services Legislative And Regulatory Update — May 21, 2012 (Mintz Levin)

“The guidance is based on proposed regulations released for comment in June 2011. Commenters on the proposed rules had expressed concerns around the application of the proposed guidance to savings and loan holding companies (SLHCs), advising that the Fed issue separate guidance for SLHCs. The final rule reflected the agencies’ belief that the guidance contains flexibility adequate to accommodate the variations in size, complexity, business activities, and risk profiles of all banking organizations meeting the asset threshold.” Read the update>>

InfoBytes, May 18, 2012 – A Weekly In-depth Review of News & Developments in the Financial Services Industry (BuckleySandler LLP)

“The regulators amended the final guidance to clarify certain issues raised during the comment period, including changes to (i) incorporate an additional principle for stress testing, (ii) clarify application of the guidance to U.S. branches and agencies of foreign banking organizations, (iii) clarify the role of a bank’s liabilities and operational risk in conducting a stress test, (iv) explain that senior management should have the primary responsibility for stress testing implementation and technical design, and (v) clarify that a banking organization’s minimum annual review and assessment should ensure that stress testing coverage is comprehensive, tests are relevant and current, methodologies are sound, and results are properly considered.” Read the update>>

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