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  • Fed, FDIC, and OCC release stress test scenarios for 2024

    On February 15, the Fed, OCC, and the FDIC released their annual stress test scenarios for 2024 to assist the agencies in evaluating their respective covered institution’s risk profile and capital adequacy. The Fed released its “2024 Stress Test Scenarios” to be used by banks and supervisors for the 2024 annual stress test. The scenarios include hypothetical sets of conditions to evaluate the banks under baseline and severely adverse scenarios. The OCC similarly released economic and financial market scenarios to be used by national banks and federal savings associations and include both baseline and severely adverse scenarios as mandated by the stress testing requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The FDIC also released its stress test scenarios for certain state nonmember banks and state savings associations in conjunction with the OCC and the Fed.

    Bank Regulatory Federal Issues Federal Reserve OCC Stress Test Bank Supervision

  • EBA report recommends environmental and social risk enhancements for financial sector

    On October 12, the European Banking Authority (EBA) announced the publication of a report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms. The report recommends risk-based enhancements to the risk categories of the Pillar 1 framework, which sets capital requirements, noting that environmental and social risks are “changing the risk picture for the financial sector” and are expected to be more prominent over time. The report puts forward recommendations for actions over the next three years as part of the revised capital requirements regulations. Specifically, the EBA is proposing to: (i) include environmental risks as part of stress testing programs; (ii) encourage the inclusion of environmental and social factors as part of external credit assessments by credit rating agencies; (iii) encourage the inclusion of environmental and social factors as part of due diligence requirements and valuation of immovable property collateral; (iv) require institutions to identify whether environmental and social factors constitute triggers of operational risk losses; and (v) develop environment-related concentration risk metrics as part of supervisory reporting. With respect to revisions to the Pillar 1 framework, the report proposes: (i) the possible use of scenario analysis to enhance the forward-looking elements of the prudential framework; (ii) changes to the role that transition plans could play in the future; (iii) reassessing the appropriateness of revising the internal ratings-based supervisory formula and the corresponding standardized approach for credit risk to better reflect environmental risk elements; and (iv) the introduction of environment-related concentration risk metrics under the Pillar 1 framework.

    Bank Regulatory EU Of Interest to Non-US Persons ESG Capital Requirements Stress Test

  • Fannie Mae, Freddie Mac annual stress tests results

    Federal Issues

    On August 10, FHFA published the Dodd-Frank Act Stress Tests Results – Severely Adverse Scenario containing the results of the ninth annual stress tests conducted by Fannie Mae and Freddie Mac (GSEs) as required by the Dodd-Frank Act. Last year, FHFA published orders for the GSEs to conduct a stress test with specific scenarios to determine whether companies have the capital necessary to absorb losses as a result of severely adverse economic conditions (covered by InfoBytes here). According to the report, the total comprehensive income loss is between $8.4 billion and $9.9 billion depending on how deferred tax assets are treated. Notably, compared to last year, the severely adverse scenario includes a larger increase in the unemployment rate due to the lower unemployment rate at the beginning of the planning horizon. FHFA also expanded the scope of entities considered within the primary counterparty default component of the worldwide market shock. This expansion encompasses mortgage insurers, unsecured overnight deposits, providers of multifamily credit enhancements, nonbank servicers, and credit risk transfer reinsurance counterparties.

    Federal Issues FHFA Fannie Mae Freddie Mac GSEs Mortgages Stress Test Dodd-Frank EGRRCPA

  • Agencies release hypothetical scenarios for 2023 bank stress tests

    On February 9, the Federal Reserve Board and the OCC released hypothetical economic scenarios for use in the upcoming stress tests for covered institutions. The Fed released supervisory scenarios, which include baseline and severely adverse scenarios. According to the Fed, the stress test evaluates large banks’ resiliency by estimating losses, net revenue, and capital levels under hypothetical recession scenarios that extend two years into the future. The Fed’s stress test also features for the first time “an additional exploratory market shock to the trading books of the largest and most complex banks” to help the agency better assess the potential of multiple scenarios in order to capture a wider array of risks in future stress test exercises. The OCC also released the agency’s scenarios for covered banks and savings associations, which will be used during supervision and will assist in the assessment of a covered institution’s risk profile and capital adequacy.

    Bank Regulatory Federal Issues Federal Reserve OCC Stress Test Bank Supervision

  • Barr suggests stress test changes may be coming

    On December 1, Federal Reserve Board Vice Chair for Supervision Michael S. Barr signaled changes may be coming to the supervisory stress test standards for large banks, as the Fed evaluates whether the test used to set capital requirements reflects an appropriately wide range of risks. Speaking during an American Enterprise Institute event, Barr commented that the Fed is also “considering the potential for stress testing to be a tool to explore different sources of financial stress and uncover channels for contagion that lead to unanticipated consequences.” He added that the use of “multiple scenarios or adapting the stress test in other ways to better account for the high degree of interconnectedness between banks and other financial entities could allow supervisors and banks to identify those conditions and take action to address them.” Financial stability risks posed by the nonbank sector are also a strong concern for regulators, Barr said, commenting that many of these firms are undercapitalized and engage in high-risk activities. He stressed that the migration of activities from banks to nonbanks should be monitored carefully, and cautioned against lowering bank capital requirements “in a race to the bottom,” particularly since nonbank financial market stress is often directly and indirectly transmitted to the banking system. Banks must have sufficient capital to remain resilient to those stresses, Barr said.

    Bank Regulatory Federal Issues Federal Reserve Supervision Stress Test Nonbank

  • FHFA orders stress tests for Fannie and Freddie

    Federal Issues

    On March 16, FHFA published orders applicable March 10 for Fannie Mae and Freddie Mac (GSEs) with respect to stress test reporting as of December 31, 2021, under Dodd-Frank as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under Dodd-Frank, certain federally regulated financial companies with total consolidated assets of more than $250 billion are required to conduct periodic stress tests to determine whether the companies have the capital necessary to absorb losses as a result of severely adverse economic conditions. The orders are accompanied by Summary Instructions and Guidance, which include stress test scenarios and revised templates (baseline, severely adverse, and variables and assumptions) for regulated companies to use when reporting the results of the stress tests (orders and instructions are available here). According to the Summary Instructions and Guidance, the GSEs have until May 20 to submit baseline and severely adverse results to FHFA and the Federal Reserve Board, and must publicly disclose a summary of severely adverse results between August 1 and 15.

    Federal Issues FHFA Fannie Mae Freddie Mac GSEs Mortgages Stress Test Dodd-Frank EGRRCPA

  • Agencies release stress-test scenarios

    Recently, the FDIC, Fed, and OCC released the hypothetical economic scenarios for use in the upcoming stress tests for covered institutions. The FDIC released supervisory scenarios, which include baseline and severely adverse scenarios. According to the FDIC, “[t]he baseline scenario is in line with a survey of private sector economic forecasters” while the “severely adverse scenario” is a “hypothetical scenario designed to assess the strength and resilience of financial institutions.” Likewise, the Fed released the results of its supervisory Dodd-Frank bank stress tests conducted on 34 large banks, which collectively hold 70 percent of bank assets in the U.S. The two scenarios, baseline and severely adverse, include 28 variables, such as GDP, unemployment rate, stock market prices, and mortgage rate. In the 2022 stress test scenario, the U.S. unemployment rate rises nearly 6 points to a peak of 10 percent over two years. The large increase in the unemployment rate is accompanied by a 40 percent decrease in commercial real estate prices, broadening corporate bond spreads, and a collapse in asset prices, including increased market volatility. The OCC also released the agency’s scenarios for banks and savings associations currently subject to Dodd-Frank stress tests.

    Bank Regulatory Federal Issues Federal Reserve FDIC OCC Stress Test Dodd-Frank

  • Fed sets resumption of share repurchases, dividends for July

    Agency Rule-Making & Guidance

    On March 25, the Federal Reserve Board announced that measures previously instituted to ensure that large banks maintain a high level of capital resilience in light of uncertainty introduced by the Covid-19 pandemic would expire for most banks after June 30. As previously covered by InfoBytes, the Fed’s measures prohibited large banks from making share repurchases and capped dividend payments. The Fed most recently advised that “[i]f a bank remains above all of its minimum risk-based capital requirements in this year’s stress test, the additional restrictions will end after June 30 and it will be subject to the [stress capital buffer]’s normal restrictions.” Banks whose capital levels fall below required levels in the stress tests will remain subject to the restrictions through September 30. Further, banks still below the capital required by the stress test at that time will face even stricter distribution limitations.

    Agency Rule-Making & Guidance Federal Reserve Covid-19 Stress Test Bank Regulatory

  • Fed finalizes rule updating capital planning and stress testing requirements

    Agency Rule-Making & Guidance

    On January 19, the Federal Reserve Board adopted a final rule updating the agency’s capital planning and stress testing requirements applicable to large bank holding companies and U.S. intermediate holding companies of foreign banking organizations. Among other things, the final rule, which is generally similar to the Fed’s September 2020 notice of proposed rulemaking (covered by InfoBytes here), conforms the capital planning, regulatory reporting, and stress capital buffer requirements for firms with $100 billion or more in total assets (Category IV) with the tailored regulatory framework approved by the Fed in 2019 (covered by InfoBytes here). The final rule also makes additional changes to the Fed’s stress testing rules, stress testing policy statement, and regulatory reporting requirements related to “business plan changes and capital actions and the publication of company-run stress test results for savings and loan holding companies.” In addition, the Fed’s capital planning and stress capital buffer requirements will now apply to covered saving and loan holding companies subject to Category II, III, and IV standards under the tailoring framework. The Fed notes that firms in the lowest risk category are on a two-year stress test cycle and will not be subject to company-run stress test requirements. The final rule takes effect 60 days after publication in the Federal Register.

    Agency Rule-Making & Guidance Federal Reserve Stress Test Of Interest to Non-US Persons Bank Regulatory

  • Fed proposes updates to capital planning requirements

    Agency Rule-Making & Guidance

    On September 30, the Federal Reserve Board issued a notice of proposed rulemaking (NPRM) to tailor the requirements in the Fed’s capital plan rule applicable to large bank holding companies and U.S. intermediate holding companies of foreign banking organizations. The changes would conform the capital planning, regulatory reporting, and stress capital buffer requirements for firms with $100 billion or more in total assets (Category IV) with the tailored regulatory framework approved by the Fed last October (covered by InfoBytes here). The NPRM would also make additional changes to the Fed’s stress testing rules, stress testing policy statement, and regulatory reporting requirements related to “business plan change assumptions, capital action assumptions, and the publication of company-run stress test results for savings and loan holding companies” to be consistent with a final rule issued last year that amended resolution planning requirements for large domestic and foreign firms (covered by InfoBytes here). These changes include removing company-run stress test requirements and implementing biennial, rather than annual, supervisory stress tests for firms subject to Category IV standards. Additionally, the Fed seeks comments on its existing capital planning guidance for firms of all sizes. Notably, the Fed states that the NPRM would not affect the calculation of firms’ capital requirements. Comments on the NPRM are due November 20.

    Agency Rule-Making & Guidance Federal Reserve Stress Test Of Interest to Non-US Persons

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