Dodd-Frank Act Stress Testing Begins for Institutions with Assets of $10 Billion to $50 Billion

Mike Milchanowski

The annual cycle for Dodd-Frank Act (DFA) stress testing for banking institutions with average assets of between $10 billion and $50 billion (midsized institutions) officially began Oct. 1. The DFA requires annual company-run stress tests for bank holding companies (BHCs) with average total assets of between $10 billion and $50 billion and for savings and loan holding companies (SLHCs) and state member banks (SMBs) with $10 billion or more in total assets. The rules were announced by the Federal Reserve Board, Federal Deposit Insurance Corp. (FDIC) and Office of the Comptroller of the Currency (OCC) on Oct. 9, 2012. The rules allow stress testing for institutions in this asset size range to be tailored to match the size and complexity of the institution. DFA stress testing is one component of a bank’s broader stress-testing program, which should also include, among other things, capital planning and an assessment of capital adequacy.

Institutions meeting the minimum average asset size requirement as of year-end 2012 are subject to DFA stress tests this fall. SLHCs will be subject to the rule at a future date to be determined. Going forward, as a company crosses the $10 billion asset threshold, it will become subject to the requirements in the test cycle starting the next calendar year.

Under the DFA stress-test rules, midsized institutions must assess the potential impact of a minimum of three macroeconomic scenarios—baseline, adverse and severely adverse—on their consolidated losses, revenues, balance sheets (including risk-weighted assets) and capital. The proposed guidance indicates that these companies should apply each scenario across all business lines and risk areas, so that they can assess the effects of a common scenario on the entire enterprise. Results of the company-run stress tests will be reported using the FR Y-16 reporting form and are due on March 31. Companies do not have to publicly disclose the results of their 2013 stress tests, but they will be required to publicly disclose the “severely adverse scenario” results beginning with the 2014 stress test.

In preparation for the Oct. 1 stress-testing start date for midsized institutions, the Fed announced an interim final rule on Sept. 24 that clarifies how companies should incorporate the Basel III regulatory capital reforms into their DFA stress tests. The interim rule provides a one-year transition period requiring most midsized institutions to calculate their stress-test projections using the Board’s current regulatory capital rules during the 2013 stress test to allow time to adjust their internal systems to the revised capital framework.

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