FDIC Releases Principles for Development and Distribution of Stress Test Scenarios
The FDIC released a Statement of Policy articulating principles for development and distribution of stress test scenarios. The FDIC defined a "stress test" as "the process to assess the potential impact of scenarios on the consolidated earnings, losses, and capital of a covered bank over the planning horizon, taking into account the current condition of the covered bank and the covered bank's risks, exposures, strategies, and activities." Stress tests, it said, help covered banks and the FDIC determine whether those banks have capital sufficient to absorb losses that could result from adverse economic conditions.
In the Policy Statement, the FDIC described "scenarios" as "those sets of conditions that affect the U.S. economy or the financial condition of a covered bank that the [FDIC] annually determines are appropriate for use in the stress tests." The scenarios provided by the FDIC reflect at least three sets of economic and financial conditions: baseline, adverse, and severely adverse. The aim, the FDIC stated, is to assess the covered banks' ability to identify and measure the risks they face under adverse conditions, and to ensure that they have sufficient capital to survive if those risks should materialize.
Finally, the FDIC discussed development and distribution of stress tests. First, the FDIC will gather information from outside entities and develop themes for the stress test scenario. The FDIC will use this information in its consideration of potential risks and scenarios. Next, the FDIC, the Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve System expect to consult to develop scenarios for stress testing.
The scenario development process will culminate with the distribution of the scenarios to all covered banksby November 15th of each year. The scenario descriptions provided to covered banks will include values for economic and financial variables depicting the paths those variables follow under the scenarios.
See: FDIC: Principles for Development and Distribution of Stress Test Scenarios.
Related News: OFR Issues Incorporating Liquidity Shocks and Feedbacks in Bank Stress Tests Brief (July 23, 2015); FRB Proposes Rule Change on Capital Planning and Stress Test Rules (July 17, 2015); Federal Banking Regulators Issue Joint Release Concerning Dodd-Frank Stress Test Requirements (July 2, 2015).