Banking and Finance Law Daily FDIC reduces company-run stress test requirements
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Tuesday, October 15, 2019

FDIC reduces company-run stress test requirements

By Richard A. Roth, J.D.

The FDIC has reduced the number of banks that must carry out stress tests, reduced the frequency of tests, and simplified the test requirements.

The Federal Deposit Insurance Corporation has amended its rules on company-run stress tests to ease test requirements in three significant ways. The amendments will:

  1. increase the asset threshold to $250 billion, from the current $10 billion;
  2. change the requirement of annual tests to a requirement of periodic tests; and
  3. eliminate one of the three tests scenarios.

An FDIC staff memorandum explaining the amendments notes that due to the increased asset threshold, no FDIC-supervised institutions currently will be covered by the agency’s stress-test regulation.

According to the FDIC’s notice, the changes will take effect 30 days after they are published in the Federal Register. The Federal Reserve Board and Office of the Comptroller of the Currency are expected to adopt identical amendments to their stress test rules.

The Dodd-Frank Act required financial companies with more than $10 billion in assets to perform annual stress tests using at least three scenarios—baseline, adverse, and severely adverse—according to regulations adopted by the regulatory agencies (see 12 U.S.C. §5365(i)). The Economic Growth, Regulatory Relief, and Consumer Protection Act changed the asset threshold for those requirements, replaced "annual" with "periodic," and eliminated the requirement that an adverse scenario must always be used.

Asset threshold. The staff memo says that in adopting the higher asset threshold, the amendment eliminates two subcategories of covered banks, those with $10 billion to $50 billion in assets and those with more than $50 billion in assets. The regulation currently imposes somewhat different reporting requirements on the two groups.

The amended regulation does not include subcategories of covered banks.

Test frequency. Under EGRRCPA, the regulatory agencies are to require "periodic" stress tests, rather than annual tests, and the Act does not say how frequent "periodic" should be. Under the rule amendments, most covered banks will need to perform tests every two years, rather than every year.

However, some institutions will remain subject to annual-test requirements. These will be covered companies that are owned by holding companies which, under Fed rules, must perform annual stress tests. The memo notes that currently there are no FDIC-supervised banks that would be subject to this requirement, even if they did exceed the $250 billion asset threshold.

The amendments also specify the schedules for performing stress tests, reporting the results to the agency, and publishing summaries of the results.

Scenarios. The staff memo says that the adverse scenario "has provided limited incremental information" beyond what the other scenarios have generated.

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