On November 15, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the Agencies) released interim guidance that describes how the Agencies will develop and distribute scenarios for use in annual stress tests required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The guidance “outlines the consultative processes that the Agencies will use to gather information on material vulnerabilities or salient risks and to coordinate with each other to develop the scenarios each year.” The scenarios include baseline, adverse and severely adverse scenarios. Each includes 26 variables, including economic activity, unemployment, exchange rates, prices, incomes and interest rates. The Agencies stated that “the adverse and severely adverse scenarios are not forecasts, but rather hypothetical scenarios designed to assess the strength and resilience of financial institutions.”
The implementing regulation required a covered institution with over $50 billion in average total consolidated assets to conduct its first stress test under the rule in September 2012. Institutions that are $10 to $50 billion in asset size must conduct their first stress test under the rule with data “as of” September 2013 with separate templates that will be forthcoming at a later date.
Section 165(i)(2) of the Dodd-Frank Act requires certain financial companies, including national banks and federal savings associations with total consolidated assets of more than $10 billion, to conduct annual stress tests.