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  • 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

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  • 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

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  • 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

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  • 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

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  • 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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  • Federal Reserve announces temporary revisions to Capital Assessment and Stress Testing Reports

    Federal Issues

    On July 8, the Federal Reserve announced revisions to its Capital Assessments and Stress Testing Reports, Form FR Y-14A/Q/M; OMB No. 7100-0341. The temporary revisions implement changes in response to the Covid-19 pandemic, including the incorporation of data related to certain aspects of the CARES Act, the Paycheck Protection Program, and Federal Reserve lending facilities. The changes apply to reports beginning with July 31, 2020, or September 30, 2020, as-of dates. Additionally, the Federal Reserve has temporarily revised the submission frequency of FR Y–14Q, Schedule H (Wholesale) from a quarterly basis to a monthly basis for Category I–III firms, effective July 31, 2020.

    Federal Issues Covid-19 CARES Act SBA Stress Test Federal Reserve

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  • Fed: Large banks “sufficiently capitalized” for Covid-19 stress

    Federal Issues

    On June 25, the Federal Reserve Board released the results of the Dodd-Frank Act stress tests for 2020 (DFAST 2020) and another report analyzing additional sensitivities due to the Covid-19 pandemic. The additional sensitivities report assessed the resiliency of large banks under three hypothetical recessions, which could result from the Covid-19 pandemic. Overall, under the hypothetical scenarios, loan losses for the 34 banks ranged from $560 billion to $700 billion in the sensitivity analysis, and aggregate capital ratios declined from 12 percent in the fourth quarter of 2019 to between 9.5 percent and 7.7 percent. The Fed concludes that due to strong current capital levels, “the large majority of banks remain sufficiently capitalized over the entirety of the projection horizon in all scenarios.” The Fed notes that this analysis did not incorporate the effects of government stimulus payments or expanded unemployment insurance. In response to the results, the Fed notes that all large banks are now required to, among other things, resubmit their capital plans later this year to reflect the current stresses, and the Fed intends to conduct additional analysis each quarter to determine if other response adjustments are needed.

    Additionally, the results of the full DFAST 2020—which was designed prior to the Covid-19 pandemic—suggest that the 33 banks subject to the test would “experience substantial losses under the severely adverse scenario but could continue lending to businesses and households, due to the substantial buildup of capital since the financial crisis.”

    Federal Issues Federal Reserve Stress Test Dodd-Frank Covid-19

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  • Fed vice chairman discusses stress testing adaptability due to Covid-19 pandemic

    Federal Issues

    On June 19, Federal Reserve Vice Chair for Supervision Randal K. Quarles spoke at a meeting of the Women in Housing and Finance regarding adjustments to the Fed’s periodic stress testing of large banks in the wake of Covid-19. Quarles explained that because the Fed lacked the time and comprehensive data to run a complete and updated Covid-19 event stress test this year, the Fed made the decision to continue with the “severely adverse scenario” begun in February 2020, while also performing a new “sensitivity analysis.” The sensitivity analysis considers three distinct downside risk paths for the economy—a rapid recovery, a slower recovery, and a W-shaped double-dip recession.

    As in past years, the Fed intends to disclose annual stress test results using the February 2020 scenario (run against bank exposures as of December 2019), which will include both firm-specific and aggregate results. Quarles also indicated the Fed would be disclosing some results from the new sensitivity analysis. According to Quarles, these results will not be firm-specific, but will be “aggregated across banks comparing how the banking system as a whole would fare under the three distinct views of the future.” The Fed also plans to “move ahead and provide all banks subject to stress testing with a stress capital buffer requirement based on the February 2020 scenario, under [the Fed’s] new approach integrating stress testing with capital requirements.” Once banks determine their final plans, the Fed will publicly release the final capital requirements for each individual bank later this year before they take effect in the fourth quarter as planned. Quarles also noted that additional policy actions, if warranted, may be taken in the coming months as the Fed continues to monitor the economic conditions.

    Federal Issues Federal Reserve Stress Test Covid-19

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  • FHFA final rule amends stress testing requirements

    Agency Rule-Making & Guidance

    On March 24, the FHFA published a final rule amending its stress testing requirements consistent with changes made by section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule adopts amendments proposed last December (covered by InfoBytes here) without change, increasing the minimum threshold for FHFA-regulated entities to conduct stress tests from $10 billion to $250 billion in total consolidated assets, removing the requirements for Federal Home Loan Banks to conduct stress tests, and reducing the number of stress test scenarios from three to two by removing the “adverse” scenario. The final rule took effect March 24.

    Agency Rule-Making & Guidance FHFA Stress Test EGRRCPA FHLB

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  • Fed finalizes simplified capital rules for large banks

    Agency Rule-Making & Guidance

    On March 4, the Federal Reserve Board (Fed) released a final rule amending and simplifying the capital rules for large banks, as well as instructions for the 2020 Comprehensive Capital Analysis and Review (CCAR) cycle. The final rule, which is “broadly similar” to the Fed’s April 2018 proposal (covered by InfoBytes here), incorporates a simplified framework that integrates a “stress capital buffer” (SCB) requirement, which will use supervisory stress test results to establish the size of a firm’s stress capital buffer requirement. The stress test—one element of the annual CCAR—helps determine a firm’s capital requirements for the upcoming year. According to the Fed, “[b]y combining the Board’s stress tests—which project the capital needs of each firm under adverse economic conditions—with the Board’s non-stress capital requirements, large banks will now be subject to a single, forward-looking, and risk-sensitive capital framework.” The simplification would result in banks needing to meet eight capital requirements, instead of the current 13. Among other things, the final rule will also (i) increase capital requirements for global systemically important banks and decrease requirements for less complex banks; and (ii) continue to subject all banks to ongoing, non-stress leverage requirements.

    The final rule applies to bank holding companies and U.S. intermediate holding companies of foreign banking organizations with more than $100 billion in total consolidated assets, and will take effect 60 days after publication in the Federal Register, with a firm’s first stress capital buffer requirement, as determined under the final rule, effective October 1, 2020.

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

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