Dodd-Frank Act Stress Test (Company-Run)

Purpose

Section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) requires national banks and federal savings associations with total consolidated assets of more than $10 billion to conduct annual stress tests. On October 9, 2012, the OCC published its final annual stress test rule (12 CFR 46), which set out definitions and rules for scope of application, scenarios, reporting, and disclosure. The rule also states that the OCC will provide the required scenarios to the covered institutions by November 15 of each year.

The results of the company-run stress tests provide the OCC with forward-looking information that will be used in bank supervision and will assist the agency in assessing the company’s risk profile and capital adequacy. The objective of the annual company-run stress test is to ensure that large, complex banking institutions have robust, forward-looking capital planning processes that account for their unique risks, and to help ensure that institutions have sufficient capital to continue operations throughout times of economic and financial stress. The OCC intends to use the data to assess the reasonableness of the stress test results and determine whether additional analytical techniques are needed to identify, measure and monitor risk. These stress test results are also expected to support ongoing improvement in a covered institution’s stress testing practices with respect to its internal assessments of capital adequacy and overall capital planning.

Scenarios

On November 15th, the OCC releases economic and financial market scenarios that are used in the annual company-run stress test under the Dodd-Frank Act. The scenarios include baseline, adverse and severely adverse scenarios. Each scenario includes 26 variables, including economic activity, unemployment, exchange rates, prices, incomes and interest rates. The adverse and severely adverse scenarios are not forecasts, but rather hypothetical scenarios designed to assess the strength and resilience of financial institutions. Note that the scenarios are expected to be the same for both the over $50 billion and $10 billion to $50 billion size institutions.

Description of Reporting Templates

These report templates collect quantitative projections of balance sheet, capital, losses, and income across three or more macroeconomic scenarios, along with qualitative information on methodologies used.

“Covered institutions” (i.e., national banks or Federal savings associations that have average total consolidated assets of more than $10 billion) are required to complete reporting templates as of September 30 each year. Under the rule, institutions over $50 billion in size as of October 9, 2012 must conduct the annual stress test in 2012. Institutions that qualify as $10 billion to $50 billion covered institutions are subject to the stress test requirements under the rule in 2013.

Over $50 Billion covered institutions are required to complete the following templates:

• DFAST-14A Contact Information
• DFAST-14A Summary Template
• DFAST-14A Scenario Template
• DFAST-14A REGCAP Template
• DFAST-14A Basel III and Dodd-Frank Act Template
• DFAST-14A Operational Risk Template
• DFAST-14A Counterparty Template

For the Trading Worksheet and Counterparty Risk Worksheet (contained in the DFAST-14A Summary Template) and the DFAST-14A Counterparty Template used in the financial market shock exercise, the financial data will be as of a specified date in the fourth quarter. Only certain institutions with large trading, private equity, or derivative activities are subject to the financial market shock exercise.

For $10 billion to $50 billion covered institutions, reporting templates have been released for public comment. The comment period ends May 10, 2013.  Please see the Agency Information Collection Activities; Proposed Collection; Comment Request; Company-Run Annual Stress Test Reporting Template and Documentation for Covered Institutions with Total Consolidated Assets of $10 Billion to $50 Billion under the Dodd-Frank Wall Street Reform and Consumer Protection Act published in the Federal Register on March 11, 2013.

The $10 billion to $50 billion covered institutions will be required to complete the following templates:

• OCC DFAST 10-50B Contact Information
• OCC DFAST 10-50B Results Template
• OCC DFAST 10-50B Scenario Variables Template

Applicability

Section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public law 111-203, 124 Stat. 1376, July 2010) requires covered institutions to conduct annual stress tests in accordance with regulation issued by the OCC.

• Over $50 billion: The implementing regulation (12 CFR 46) required a covered institution with over $50 billion in average total consolidated assets to conduct its first stress test under the rule using financial data “as of” September 30, 2012. The stress tests will be conducted annually in accordance with the regulation.
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• $10 billion to $50 billion: The implementing regulation (12 CFR 46) requires a covered institution with $10 billion to $50 billion in average total consolidated assets to conduct its first stress test using financial data “as of” September 30, 2013.

As defined in the Annual Stress Test rule, the measurement of average total consolidated assets is calculated as the average of the covered institution’s total consolidated assets, as reported on the Call Reports, for the four most recent consecutive quarters. If a covered institution has not filed a Call Report for each of the four most recent consecutive quarters, the average total consolidated assets is calculated as the average of the institution’s total consolidated assets, as reported on the Call Reports, for the most recent one or more consecutive quarters. National banks and Federal savings associations become subject to the annual stress testing requirement on the “as of” date of the most recent Call Report used in the calculation of the average.

Disclosure of Annual Stress Test Results

The Annual Stress Test rule (12 CFR 46.8) requires the covered institutions to publish a summary of the results of its annual stress tests. The required summary of results may be published on the covered institution’s web site or in any other forum that is reasonably accessible to the public.

Related Links

• OCC published interim guidance on stress testing scenarios: Policy Statement on the Principles for Development and Distribution of Annual Stress Test Scenarios
• OCC's Final Rule on Annual Stress Test
• Agency Information Collection Activities; Proposed Collection; Comment Request; Company-Run Annual Stress Test Reporting Template and Documentation for Covered Institutions with Total Consolidated Assets of $10 Billion to $50 Billion under the Dodd-Frank Wall Street Reform and Consumer Protection Act
• OCC Proposes Annual Stress Test Reporting Requirements for Covered Institutions with Consolidated Assets of $50 Billion or More