The Federal Deposit Insurance Corporation (FDIC) has issued a notice of proposed rulemaking (NPR) for comment. The NPR would require the larger of the banks it regulates to conduct annual capital-adequacy stress tests. The tests are one requirement of the Dodd-Frank Wall Street Reform Act and will affect FDIC-insured banks and savings institutions with assets of more than $10 billion. The FDIC currently has 23 financial institutions meeting that criterion
The proposed rule focuses on capital adequacy and defines a stress test as a process to assess the potential impact on the bank of economic and financial conditions ("scenarios") on the consolidated earnings, losses, and capital of the covered bank over a set planning horizon. FDIC said that these stress tests would be one component of the broader stress testing activities conducted by the banks which should address the impact of a broad range of potentially negative outcomes across a broad set of risk types with impacts beyond capital adequacy along. These, however, are beyond the scope of the proposed rule.
Under the NPR each covered bank would be required to conduct the test annually using the bank's financial data as of September 30 of that year. Where the parent company structure of the covered bank includes one or more financial companies, each with assets greater than the $10 billion threshold, the stress test requirement applies to the parent and to each subsidiary meeting the threshold, however the FDIC will coordinate with other regulatory agencies to minimize complexity or duplication of effort.
As proposed, FDIC would provide each covered bank with a minimum of three sets of scenarios representing baseline, adverse, and severely adverse economic and financial conditions and each bank would use these scenarios to calculate the impact on its potential losses, pre-provision revenues, loan loss reserves and pro forma capital positions for each quarter end within the planning horizon.
The NPR also describes the content of the reports institutions are required to publish, and the timeline for conducting the stress tests and producing the required reports.
FDIC Acting Chairman Martin J. Gruenberg said, "Both the FDIC and the institutions being tested will benefit from the forward-looking results that the stress tests will provide. The results will assist in ensuring an institution's financial stability by helping determine whether it has sufficient capital levels to withstand a period of economic stress."
The FDIC's proposal will be published in the Federal Register with a 60-day public comment period.