Guidance Proposed Guidance on Stress Testing for Banking Organizations with More Than $10 Billion in Total Consolidated Assets
FederalAgency guidance
Ask Donna
How this section applies to your facts.
FDIC Financial Institution Letters › Guidance Proposed Guidance on Stress Testing for Banking Organizations with More Than $10 Billion in Total Consolidated Assets
Text
35072
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
(d) Any employee of the Treasury or
the CFPB in his or her individual
capacity where DOJ has agreed to
represent the employee; or
(e) The United States, where the
Treasury or the CFPB determines that
litigation is likely to affect the Treasury
or any of its components or the CFPB.
(4) Appropriate agencies, entities, and
persons, to the extent necessary to
respond to or refer correspondence;
(5) A court, magistrate, or
administrative tribunal, including
disclosures to opposing counsel or
witnesses in the course of civil
discovery, litigation, or settlement
negotiations or in connection with
criminal law proceedings when the
Treasury or the CFPB is party to the
proceeding or has a significant interest
in the proceeding;
(6) A grand jury pursuant either to a
Federal or state grand jury subpoena, or
to a prosecution request that such
record be released for the purpose of its
introduction to a grand jury, where the
subpoena or request has been
specifically approved by a court;
(7) Congressional offices in response
to correspondence submitted at the
request of the individual to whom the
record pertains;
(8) Appropriate Federal, foreign, state,
local, Tribal, or other public authorities
or self-regulatory organizations
responsible for investigating or
prosecuting the violations of, or for
enforcing or implementing, a statute,
rule, regulation, order, or license, where
the disclosing agency becomes aware of
an indication of a violation of civil or
criminal law or regulation;
rd pertains;
(8) Appropriate Federal, foreign, state,
local, Tribal, or other public authorities
or self-regulatory organizations
responsible for investigating or
prosecuting the violations of, or for
enforcing or implementing, a statute,
rule, regulation, order, or license, where
the disclosing agency becomes aware of
an indication of a violation of civil or
criminal law or regulation;
(9) Another Federal agency to (a)
permit a decision as to access,
amendment, or correction of records to
be made in consultation with or by that
agency, or (b) verify the identity of an
individual or the accuracy of
information submitted by an individual
who has requested access to,
amendment of, or correction of records.
POLICIES AND PRACTICES FOR STORING,
RETRIEVING, ACCESSING, RETAINING, AND
DISPENSING OF RECORDS IN THE SYSTEM:
STORAGE:
Records maintained in this system are
stored electronically and in file folders.
Paper copies of individual records are
made by the authorized CFPB
implementation team staff.
RETRIEVABILITY:
Records are retrievable by the name of
the individual covered by the system,
date of correspondence, or
correspondence control number.
SAFEGUARDS:
Access to electronic records is
restricted to authorized personnel who
have been issued non-transferrable
access codes and passwords. Other
records are maintained in locked file
cabinets or rooms with access limited to
those personnel whose official duties
require access.
RETENTION AND DISPOSAL:
Computer and paper records will be
maintained indefinitely until a records
disposition schedule is approved by the
National Archives and Records
Administration.
SYSTEM MANAGER(S) AND ADDRESS:
Consumer Financial Protection
Bureau implementation team, 1801 L
Street, NW., Washington, DC 20036
h access limited to
those personnel whose official duties
require access.
RETENTION AND DISPOSAL:
Computer and paper records will be
maintained indefinitely until a records
disposition schedule is approved by the
National Archives and Records
Administration.
SYSTEM MANAGER(S) AND ADDRESS:
Consumer Financial Protection
Bureau implementation team, 1801 L
Street, NW., Washington, DC 20036.
NOTIFICATION PROCEDURE:
Individuals seeking notification and
access to any record contained in this
database, or seeking to contest its
content, may inquire in writing in
accordance with instructions appearing
at 31 CFR part 1, subpart C, appendix
A. Address such requests to: Director,
Disclosure Services, Department of
Treasury, 1500 Pennsylvania Avenue,
NW., Washington, DC 20220.
RECORD ACCESS PROCEDURES:
See ‘‘Notification Procedures,’’ above.
CONTESTING RECORD PROCEDURES:
See ‘‘Notification Procedures,’’ above.
RECORD SOURCE CATEGORIES:
Information in this system is
maintained about individuals who
submit correspondence to the CFPB
implementation team and employees
assigned to help process, review, or
respond to correspondence.
EXEMPTIONS CLAIMED FOR THE SYSTEM:
None.
[FR Doc. 2011–14834 Filed 6–14–11; 8:45 am]
BILLING CODE 4810–25–P
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
[Docket No. OCC–2011–0011]
FEDERAL RESERVE SYSTEM
[Docket No. OP–1421]
FEDERAL DEPOSIT INSURANCE
CORPORATION
Proposed Guidance on Stress Testing
for Banking Organizations With More
Than $10 Billion in Total Consolidated
Assets
AGENCIES: Office of the Comptroller of
the Currency, Treasury (‘‘OCC’’); Board
of Governors of the Federal Reserve
System (‘‘Board’’ or ‘‘Federal Reserve’’);
Federal Deposit Insurance Corporation
(‘‘FDIC’’).
ACTION: Proposed joint guidance with
request for public comment.
SUMMARY: The OCC, Board, and the
FDIC (collectively, the ‘‘agencies’’)
request comment on proposed guidance
on stress testing (proposed guidance)
roller of
the Currency, Treasury (‘‘OCC’’); Board
of Governors of the Federal Reserve
System (‘‘Board’’ or ‘‘Federal Reserve’’);
Federal Deposit Insurance Corporation
(‘‘FDIC’’).
ACTION: Proposed joint guidance with
request for public comment.
SUMMARY: The OCC, Board, and the
FDIC (collectively, the ‘‘agencies’’)
request comment on proposed guidance
on stress testing (proposed guidance).
The proposed joint guidance outlines
high-level principles for stress testing
practices, applicable to all Federal
Reserve-supervised, FDIC-supervised,
and OCC-supervised banking
organizations with more than $10
billion in total consolidated assets. The
proposed guidance highlights the
importance of stress testing as an
ongoing risk management practice that
supports a banking organization’s
forward-looking assessment of its risks.
DATES: Comments must be submitted on
or before July 29, 2011.
ADDRESSES: OCC: Please use the title
‘‘Proposed Guidance on Stress Testing’’
to facilitate the organization and
distribution of the comments. You may
submit comments by any of the
following methods:
• E-mail:
regs.comments@occ.treas.gov.
• Mail: Office of the Comptroller of
the Currency, 250 E Street, SW., Mail
Stop 2–3, Washington, DC 20219.
• Fax: (202) 874–5274.
• Hand Delivery/Courier: 250 E
Street, SW., Mail Stop 2–3, Washington,
DC 20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
Number OCC–2011–0011’’ in your
comment. In general, OCC will enter all
comments received into the docket and
publish them on the Regulations.gov
Web site without change, including any
business or personal information that
you provide such as name and address
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00120
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
’ in your
comment. In general, OCC will enter all
comments received into the docket and
publish them on the Regulations.gov
Web site without change, including any
business or personal information that
you provide such as name and address
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00120
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
35073
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
1 For purposes of this guidance, the term
‘‘banking organization’’ means national banks and
Federal branches and agencies supervised by the
OCC; state member banks, bank holding companies,
and all other institutions for which the Federal
Reserve is the primary Federal supervisor; and state
nonmember insured banks and other institutions
supervised by the FDIC.
2 See, for example, Supervision and Regulation
(SR) letter 10–6 or OCC Bulletin 2010–13 or FDIC
FIL–13–2010, ‘‘Interagency Policy Statement on
Funding and Liquidity Risk Management’’; SR 10–
1 or OCC Bulletin 2010–1 or FDIC Financial
Institution Letter (FIL–2–2010), ‘‘Interagency
Advisory on Interest Rate Risk’’; SR letter 09–04,
‘‘Applying Supervisory Guidance and Regulations
on the Payment of Dividends, Stock Redemptions,
and Stock Repurchases at Bank Holding
Companies’’; SR letter 07–1, ‘‘Interagency Guidance
on Concentrations in Commercial Real Estate’’ or
OCC Bulletin 2006–46 or FDIC FIL–104–2006,
‘‘Interagency Guidance on CRE Concentration Risk
Management’’; SR letter 99–18, ‘‘Assessing Capital
Adequacy in Relation to Risk at Large Banking
Organizations and Others with Complex Risk
Profiles’’; OCC Bulletin 2008–20 or FDIC FIL–71–
2008 ‘‘Supervisory Guidance: Supervisory Review
Process of Capital Adequacy (Pillar 2) Related to the
Implementation of the Basel II Advanced Capital
Framework’’; the Supervisory Capital Assessment
Program (see http://www.federalreserve.gov/
newsevents/press/bcreg/bcreg20080715a1.pdf); and
Comprehensive Capital Analysis a
s with Complex Risk
Profiles’’; OCC Bulletin 2008–20 or FDIC FIL–71–
2008 ‘‘Supervisory Guidance: Supervisory Review
Process of Capital Adequacy (Pillar 2) Related to the
Implementation of the Basel II Advanced Capital
Framework’’; the Supervisory Capital Assessment
Program (see http://www.federalreserve.gov/
newsevents/press/bcreg/bcreg20080715a1.pdf); and
Comprehensive Capital Analysis and Review:
Objectives and Overview (see
www.federalreserve.gov/newsevents/press/bcreg/
20110318a.htm ).
3 See ‘‘Principles for Sound Stress Testing
Practices and Supervision,’’ Basel Committee on
Banking Supervision, May 2009.
information, e-mail addresses, or phone
numbers. Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
notice by any of the following methods:
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 250 E Street,
SW., Washington, DC. For security
reasons, the OCC requires that visitors
make an appointment to inspect
comments. You may do so by calling
(202) 874–4700. Upon arrival, visitors
will be required to present valid
government-issued photo identification
and to submit to security screening in
order to inspect and photocopy
comments.
• Docket: You may also view or
request available background
documents and project summaries using
the methods described above.
Board: When submitting comments,
please consider submitting your
comments by e-mail or fax because
paper mail in the Washington, DC area
and at the Board may be subject to
delay. You may submit comments,
identified by Docket No. OP–1411, by
any of the following methods:
• Agency Web Site: http://
www.federalreserve.gov
documents and project summaries using
the methods described above.
Board: When submitting comments,
please consider submitting your
comments by e-mail or fax because
paper mail in the Washington, DC area
and at the Board may be subject to
delay. You may submit comments,
identified by Docket No. OP–1411, by
any of the following methods:
• Agency Web Site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail:
regs.comments@federalreserve.gov.
Include docket number in the subject
line of the message.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551.
All public comments are available
from the Board’s Web site at http://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed electronically or in
paper form in Room MP–500 of the
Board’s Martin Building (20th and C
Street, NW.,Washington, DC 20551)
between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit comments by
any of the following methods:
• Agency Web site: http://
www.FDIC.gov/regulations/laws/
federal/propose.html. Follow the
instructions for submitting comments.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail: comments@FDIC.gov.
Include ‘‘Stress Testing Guidance’’ in
the subject line of the message.
Comments received will be posted
without change to http://www.FDIC.gov/
regulations/laws/federal/propose.html,
including any personal information
provided.
• Mail: Robert E
ments.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail: comments@FDIC.gov.
Include ‘‘Stress Testing Guidance’’ in
the subject line of the message.
Comments received will be posted
without change to http://www.FDIC.gov/
regulations/laws/federal/propose.html,
including any personal information
provided.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments/Legal
ESS, Federal Deposit Insurance
Corporation, 550 17th Street, NW.,
Washington, DC 20429.
• Hand Delivery/Courier: Guard
station at the rear of the 550 17th Street
Building (located on F Street), on
business days between 7 a.m. and 5 p.m.
(EDT).
FOR FURTHER INFORMATION CONTACT:
OCC: Robert Scavotto, Lead
International Expert, International
Analysis and Banking Condition (202)
874–4943, Tanya Smith, NBE, Basel II
Program Manager, Large Bank
Supervision (202) 874–4464, Akhtarur
Siddique, Deputy Director, Enterprise
Risk Analysis Division (202) 874–4665,
or Jeanette Quick, Attorney, Legislative
and Regulatory Activities Division (202)
874–5090, Office of the Comptroller of
the Currency, 250 E Street, SW.,
Washington, DC 20219.
Board: Anna Lee Hewko, Assistant
Director, Capital and Regulatory Policy
(202) 530–6260, or Constance M.
Horsley, Manager, Capital and
Regulatory Policy (202) 452–5239,
David Palmer, Senior Supervisory
Analyst, Risk Section, (202) 452–2904,
Sviatlana Phelan, Financial Analyst,
Capital and Regulatory Policy (202)
912–4306, Division of Banking
Supervision and Regulation; or
Benjamin W. McDonough, Counsel,
(202) 452–2036, or Dominic A. Labitzky,
Senior Attorney, (202) 452–3428, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551.
FDIC: George French, Deputy
Director, Policy, (202) 898–3929; Robert
Burns, Chief, Exam Support & Analysis
Section, (704) 333–3132 x4215; Karl
Reitz, Senior Capital Markets Specialist,
cDonough, Counsel,
(202) 452–2036, or Dominic A. Labitzky,
Senior Attorney, (202) 452–3428, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551.
FDIC: George French, Deputy
Director, Policy, (202) 898–3929; Robert
Burns, Chief, Exam Support & Analysis
Section, (704) 333–3132 x4215; Karl
Reitz, Senior Capital Markets Specialist,
(202) 898–6775, Division of Risk
Management Supervision; or Mark
Flanigan, Counsel, (202) 898–7426;
Ryan Clougherty, Senior Attorney, (202)
898–3843, Supervision Branch, Legal
Division.
SUPPLEMENTARY INFORMATION:
I. Background
All banking organizations should
have the capacity to understand their
risks and the potential impact of
stressful events and circumstances on
their financial condition.1 The U.S.
Federal banking agencies have
previously highlighted the use of stress
testing as a means to better understand
the range of a banking organization’s
potential risk exposures.2 The 2007–
2009 financial crisis further
underscored the need for banking
organizations to incorporate stress
testing into their risk management, as
banking organizations unprepared for
stressful events and circumstances can
suffer acute threats to their financial
condition and viability. The proposed
guidance is intended to be consistent
with industry practices and with
international supervisory standards.3
Building upon previously issued
supervisory guidance that discusses the
uses and merits of stress testing in
specific areas of risk management, the
proposed guidance provides an
overview of how a banking organization
should structure its stress testing
activities and ensure they fit into overall
risk management. The purpose of this
guidance is to outline broad principles
for a satisfactory stress testing
framework and describe the manner in
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
anization
should structure its stress testing
activities and ensure they fit into overall
risk management. The purpose of this
guidance is to outline broad principles
for a satisfactory stress testing
framework and describe the manner in
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
35074
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
4 Public Law 111–203, 124 Stat. 1376. Section
165(i) of the Dodd-Frank Act is codified at 12 U.S.C.
5365(i).
which stress testing should be employed
as an integral component of risk
management that is applicable at
various levels of aggregation within a
banking organization, as well as for
contributing to capital and liquidity
planning. While the guidance is not
intended to provide detailed
instructions for conducting stress testing
for any particular risk or business area,
the proposed guidance aims to describe
several types of stress testing activities
and how they may be most
appropriately used by banking
organizations. The guidance does not
explicitly address the stress testing
requirements imposed upon certain
companies by section 165(i) of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act.4 The Board,
FDIC, and OCC expect to implement
that provision in a future rulemaking
that would be consistent with the
principles in the proposed guidance.
II. Principal Elements of the Proposed
Guidance
The agencies are issuing this
proposed guidance to emphasize the
importance of stress testing as an
ongoing risk management practice that
supports banking organizations’
forward-looking assessment of risks and
better equips them to address a range of
adverse outcomes. The proposed joint
guidance is applicable to all banking
organizations supervised by the
agencies with more than $10 billion in
total consolidated assets
oposed guidance to emphasize the
importance of stress testing as an
ongoing risk management practice that
supports banking organizations’
forward-looking assessment of risks and
better equips them to address a range of
adverse outcomes. The proposed joint
guidance is applicable to all banking
organizations supervised by the
agencies with more than $10 billion in
total consolidated assets. Specifically,
with respect to the OCC, these banking
organizations would include national
banking associations and Federal
branches and agencies; with respect to
the Board, these banking organizations
would include state member banks,
bank holding companies, and all other
institutions for which the Federal
Reserve is the primary Federal
supervisor; with respect to the FDIC,
these banking organizations would
include state nonmember insured banks
or insured branches of foreign banks. A
banking organization should develop
and implement its stress testing
framework in a manner commensurate
with its size, complexity, business
activities, and overall risk profile.
The uses of a banking organization’s
stress testing framework should include,
but are not limited to, augmenting risk
identification and measurement;
estimating business line revenues and
losses and informing business line
strategies; identifying vulnerabilities
and assessing their potential impact;
assessing capital adequacy and
enhancing capital planning; assessing
liquidity adequacy and informing
contingency funding plans; contributing
to strategic planning; enabling senior
management to better integrate strategy,
risk management, and capital and
liquidity planning decisions; and
assisting with recovery planning.
A. Stress Testing Principles
Principle 1: A banking organization’s
stress testing framework should include
activities and exercises that are tailored
to and sufficiently capture the banking
organization’s exposures, activities, and
risks
ng senior
management to better integrate strategy,
risk management, and capital and
liquidity planning decisions; and
assisting with recovery planning.
A. Stress Testing Principles
Principle 1: A banking organization’s
stress testing framework should include
activities and exercises that are tailored
to and sufficiently capture the banking
organization’s exposures, activities, and
risks.
An effective stress testing framework
covers a banking organization’s full set
of material activities, exposures, and
risks, whether on or off the balance
sheet. An effective stress testing
framework should be applied at various
levels in the banking organization, such
as business line, portfolio, and risk type,
as well as on an enterprise-wide basis.
Each stress test should be tailored to the
relevant level of aggregation, capturing
critical risk drivers, internal and
external influences, and other key
considerations at the relevant level.
Stress testing should capture the
interplay among different exposures,
activities, and risks and their combined
effects. Scenarios used in a banking
organization’s stress tests should be
relevant to the direction and strategy set
by its board of directors.
Principle 2: An effective stress testing
framework employs multiple
conceptually sound stress testing
activities and approaches.
Banking organizations should use
multiple stress testing activities and
approaches and ensure that each is
conceptually sound. Stress tests usually
vary in design and complexity,
including the number of factors
employed and the degree of stress
applied. Effective stress testing relies on
high-quality input data and information
to produce credible outcomes. A
banking organization should document
the assumptions used in its stress tests
and note the degree of uncertainty that
may be incorporated into the tools used
for stress testing
vary in design and complexity,
including the number of factors
employed and the degree of stress
applied. Effective stress testing relies on
high-quality input data and information
to produce credible outcomes. A
banking organization should document
the assumptions used in its stress tests
and note the degree of uncertainty that
may be incorporated into the tools used
for stress testing. Furthermore, almost
all stress tests, including well-
developed quantitative tests supported
by high-quality data, employ a certain
amount of expert or business judgment
that should be made transparent to users
of stress test results.
Principle 3: An effective stress testing
framework is forward-looking and
flexible.
A stress testing framework should be
sufficiently dynamic and flexible to
incorporate changes in a banking
organization’s on- and off-balance-sheet
activities, portfolio composition, asset
quality, operating environment,
business strategy, and other risks that
may arise. While stress testing should
utilize available historical information,
a banking organization should look
beyond assumptions based only on
historical data and challenge
conventional assumptions. A banking
organization should carefully consider
the incremental and cumulative effects
of stress conditions. In addition to
conducting formal, routine stress tests, a
banking organization should have the
flexibility to conduct new or ad hoc
stress tests in a timely manner to
address rapidly emerging risks. A
banking organization should continue
updating and maintaining its stress
testing framework in light of new risks,
better understanding of the banking
organization’s exposures and activities,
and any changes in its operating
structure and environment.
Principle 4: Stress test results should
be clear, actionable, well supported, and
inform decision-making.
Stress testing should incorporate
measures that adequately and effectively
convey the results of its tests
testing framework in light of new risks,
better understanding of the banking
organization’s exposures and activities,
and any changes in its operating
structure and environment.
Principle 4: Stress test results should
be clear, actionable, well supported, and
inform decision-making.
Stress testing should incorporate
measures that adequately and effectively
convey the results of its tests. In
addition, all stress test results should be
accompanied by descriptive and
qualitative information (such as key
assumptions and limitations) to allow
users to interpret the exercises in
context. A banking organization should
regularly communicate stress test results
to appropriate levels within the banking
organization to foster dialogue around
stress testing, keep management and
staff apprised, and to inform stress
testing approaches, results, and
decisions in other areas of the banking
organization. In addition, management
should review stress testing activities on
a regular basis to determine, among
other things, the validity of the
assumptions, the severity of scenarios
and sensitivity tests, the robustness of
the estimates, the performance of any
underlying models, and the stability and
reasonableness of the results. Finally,
stress test results should inform a
banking organization’s analysis and
decision-making.
B. Stress Testing Approaches and
Applications
The proposed guidance describes
certain stress testing approaches and
applications—scenario analysis,
sensitivity analysis, enterprise-wide
testing, and reverse stress testing—that
a banking organization should strongly
consider using within its stress testing
framework, as appropriate. Each
banking organization should apply these
approaches and applications
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
enterprise-wide
testing, and reverse stress testing—that
a banking organization should strongly
consider using within its stress testing
framework, as appropriate. Each
banking organization should apply these
approaches and applications
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
35075
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
5 The portions of the proposed guidance that
discuss stress testing for capital adequacy do not
apply to U.S. branches and agencies of foreign
banking organizations.
6 See SR letter 10–6, SR letter 10–1; OCC Bulletin
2010–13, OCC Bulletin 2010–1; FDIC FIL 13–2010
and FIL 2–2010.
commensurate with its size, complexity,
and business profile, and may not need
to incorporate all of the details
described in the proposed guidance.
Scenario Analysis
Scenario analysis refers to a type of
stress testing in which a banking
organization applies historical or
hypothetical scenarios to assess the
impact of various events and
circumstances, including extreme ones.
Scenarios usually involve some kind of
coherent, logical narrative or ‘‘story’’ as
to why certain events and circumstances
are occurring and in which combination
and order they occur, such as a severe
recession, failure of a major
counterparty, loss of major clients,
natural or man-made disaster, localized
economic downturn, or a sudden
change in interest rates brought about by
unfavorable inflation developments.
Stress scenarios should reflect a banking
organization’s unique vulnerabilities to
factors that affect its exposures,
activities, and risks
order they occur, such as a severe
recession, failure of a major
counterparty, loss of major clients,
natural or man-made disaster, localized
economic downturn, or a sudden
change in interest rates brought about by
unfavorable inflation developments.
Stress scenarios should reflect a banking
organization’s unique vulnerabilities to
factors that affect its exposures,
activities, and risks.
Sensitivity Analysis
Sensitivity analysis refers to a banking
organization’s assessment of its
exposures, activities, and risks when
certain variables, parameters, and inputs
are ‘‘stressed’’ or ‘‘shocked.’’ Generally,
sensitivity analysis differs from scenario
analysis in that it involves changing
variables, parameters, or inputs without
an explicit underlying reason or
narrative, in order to explore what
occurs under a range of inputs and at
extreme or highly adverse levels.
Sensitivity analysis can also help to
assess the combined impact on a
banking organization of several
variables, parameters, factors, or drivers.
Enterprise-Wide Stress Testing
Enterprise-wide stress testing involves
assessing the impact of certain specified
scenarios on the banking organization as
a whole, particularly on capital and
liquidity. As is the case with scenario
analysis more generally, enterprise-wide
stress testing involves robust scenario
design and effective translation of
scenarios into measures of impact.
Enterprise-wide stress tests can help a
banking organization in its efforts to
assess the impact of its full set of risks
under adverse events and
circumstances, but should be
supplemented with other stress tests
and other risk measurement tools given
inherent limitations in capturing all
risks and all adverse outcomes.
Selection of scenario variables is
important for enterprise-wide tests,
because they generally serve as the link
between the overall narrative of the
scenario and tangible impact on the
banking organization as a whole
rcumstances, but should be
supplemented with other stress tests
and other risk measurement tools given
inherent limitations in capturing all
risks and all adverse outcomes.
Selection of scenario variables is
important for enterprise-wide tests,
because they generally serve as the link
between the overall narrative of the
scenario and tangible impact on the
banking organization as a whole. For an
enterprise-wide test, assumptions across
business lines and risk areas should
remain constant for the chosen scenario,
since the objective is to see how the
banking organization as a whole
responds to a common outcome.
Reverse Stress Testing
Reverse stress testing is a tool that
allows a banking organization to assume
a known adverse outcome, such as
suffering a credit loss that breaches
regulatory capital ratios or suffering
severe liquidity constraints making it
unable to meet its obligations, and then
deduce the types of events that could
lead to such an outcome. This type of
stress testing may help a banking
organization to consider scenarios
beyond its normal business expectations
and see the impact of severe systemic
effects on the banking organization. It
also allows a banking organization to
challenge common assumptions about
its performance and expected mitigation
strategies. Reverse stress testing helps a
banking organization evaluate the
combined effect of several types of
extreme events and circumstances that
might threaten the survival of the
banking organization, even if in
isolation each of the effects might be
manageable.
C. Stress Testing for Assessing
Adequacy of Capital and Liquidity
Given the importance of capital and
liquidity to a banking organization’s
viability, stress testing should be
applied to these two areas on a regular
basis. Stress testing for capital and
liquidity adequacy should be conducted
in coordination with a banking
organization’s overall strategy and
annual and planning cycles
e.
C. Stress Testing for Assessing
Adequacy of Capital and Liquidity
Given the importance of capital and
liquidity to a banking organization’s
viability, stress testing should be
applied to these two areas on a regular
basis. Stress testing for capital and
liquidity adequacy should be conducted
in coordination with a banking
organization’s overall strategy and
annual and planning cycles. Results
should be refreshed in the event of
major strategic decisions, or other
decisions that can materially impact
capital or liquidity. Banking
organizations should conduct stress
testing for capital and liquidity
adequacy periodically.
Capital stress testing supplements a
banking organization’s regulatory
capital analysis by providing a forward-
looking assessment of capital adequacy,
usually with a forecast horizon of at
least two years, and highlighting the
potential adverse effects on capital
levels and ratios of risks not fully
captured in regulatory capital
requirements.5 Stress testing can aid
capital contingency planning by helping
management identify exposures or risks
that would need to be reduced and
actions that could be taken to bolster
capital levels or otherwise maintain
capital adequacy, as well as actions that
in times of stress might not be
possible—such as raising capital.
Using liquidity stress testing, a
banking organization can work to
identify vulnerabilities related to
liquidity adequacy in light of both firm-
specific and market-wide stress events
and circumstances.6 Effective stress
testing helps a banking organization
identify and quantify the depth, source,
and degree of potential liquidity strain
and to analyze possible impacts on its
cash flows, liquidity position,
profitability, and other aspects of its
financial condition over various time
horizons. These tests also help
determine whether the banking
organization has a sufficient liquidity
buffer to meet various types of future
liquidity demands
identify and quantify the depth, source,
and degree of potential liquidity strain
and to analyze possible impacts on its
cash flows, liquidity position,
profitability, and other aspects of its
financial condition over various time
horizons. These tests also help
determine whether the banking
organization has a sufficient liquidity
buffer to meet various types of future
liquidity demands. In this regard,
liquidity stress testing should be an
integral part of the development and
maintenance of a banking organization’s
contingency funding planning.
An effective stress testing framework
should explore the potential for capital
and liquidity problems to arise at the
same time or exacerbate one another. A
banking organization’s liquidity stress
analysis should explore situations in
which the banking organization may be
operating with a capital position that
exceeds regulatory minimums, but is
nonetheless viewed within the financial
markets or by its counterparties as being
of questionable viability. For its capital
and liquidity stress tests, a banking
organization should articulate clearly its
objectives for a post-stress outcome, for
instance to remain a viable financial
market participant that is able to meet
its existing and prospective obligations
and commitments.
D. Governance Over the Stress Testing
Framework
Similar to other aspects of its risk
management, a banking organization’s
stress testing framework will be
effective only if it is subject to strong
governance and controls to ensure that
the framework is functioning as
intended. Strong governance and
controls also help ensure that the
framework contains core elements, from
clearly defined stress testing objectives
to recommended actions
Similar to other aspects of its risk
management, a banking organization’s
stress testing framework will be
effective only if it is subject to strong
governance and controls to ensure that
the framework is functioning as
intended. Strong governance and
controls also help ensure that the
framework contains core elements, from
clearly defined stress testing objectives
to recommended actions. Importantly,
strong governance provides critical
review of elements of the stress testing
framework, especially regarding key
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
35076
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
assumptions, uncertainties, and
limitations. A banking organization
should ensure that the stress testing
framework is not isolated within a
banking organization’s risk management
function, but is firmly integrated into
business lines, capital and asset-liability
committees, and other decision-making
bodies.
The results of stress testing analyses
should facilitate decision-making by the
board and senior management. Stress
testing results should be used to inform
the board about alignment of the
banking organization’s risk profile with
the board’s chosen risk appetite, as well
as inform operating and strategic
decisions. Stress testing results should
be considered directly by the board and
senior management for decisions
relating to capital and liquidity
adequacy. The board and senior
management should ensure that the
stress testing framework includes a
sufficient range of stress testing
activities applied at the appropriate
levels of the banking organization (i.e.,
not just one enterprise-wide stress test).
III. Request for Comment
The agencies invite comment on all
aspects of the proposed guidance
ons
relating to capital and liquidity
adequacy. The board and senior
management should ensure that the
stress testing framework includes a
sufficient range of stress testing
activities applied at the appropriate
levels of the banking organization (i.e.,
not just one enterprise-wide stress test).
III. Request for Comment
The agencies invite comment on all
aspects of the proposed guidance. More
specifically, what, if any, additional
elements or aspects of an effective stress
testing framework should the agencies
consider including in this guidance?
What additional approaches and
applications of stress testing have been
found to be particularly useful aside
from those included in the proposed
guidance? What challenges, if any, exist
in applying this guidance generally or at
particular banking organizations and
why? Are there any terms described by
the proposed guidance that require
further clarification and how should
they be defined?
IV. Administrative Law Matters
A. Paperwork Reduction Act Analysis
In accordance with the Paperwork
Reduction Act (‘‘PRA’’) of 1995 (44
U.S.C. 3506; 5 CFR part 1320 Appendix
A.1), the agencies reviewed the
proposed guidance. The agencies may
not conduct or sponsor, and an
organization is not required to respond
to, an information collection unless the
information collection displays a
currently valid OMB control number.
The agencies have determined that
certain aspects of the proposed guidance
may constitute a collection of
information. In particular, these aspects
are the provisions that state a banking
organization should (i) have a stress
testing framework that includes clearly
defined objectives, well-designed
scenarios tailored to the banking
organization’s business and risks, well-
documented assumptions, conceptually
sound methodologies to assess potential
impact on the banking organization’s
financial condition, informative
management reports, and recommended
actions based on stress test results and
i) have a stress
testing framework that includes clearly
defined objectives, well-designed
scenarios tailored to the banking
organization’s business and risks, well-
documented assumptions, conceptually
sound methodologies to assess potential
impact on the banking organization’s
financial condition, informative
management reports, and recommended
actions based on stress test results and
(ii) have policies and procedures for a
stress testing framework. The agencies
estimate that the above-described
information collections included in the
proposed guidance would take
respondents, on average, 260 hours each
year. The frequency of information
collection is estimated to be annual.
Respondents are banking organizations
with more than $10 billion in total
consolidated assets, as defined in the
guidance:
OCC:
Respondents: 50.
Estimated annual burden: 13,000
hours.
Board:
Respondents: 120.
Estimated annual burden: 31,200
hours.
FDIC:
Respondents: 22.
Estimated annual burden: 5,720
hours.
OCC: For purposes of the PRA, this
information collection will be titled
Recordkeeping and Disclosure
Provisions Associated with Stress
Testing Guidance.
This information collection is
authorized pursuant to the National
Bank Act, (12 U.S.C. 1 et seq.; 12 U.S.C.
161) and the International Banking Act
(12 U.S.C. 3101 et seq.). The OCC
expects to review the policies and
procedures for stress testing as part of
its supervisory process. To the extent
the OCC collects information during an
examination of a banking organization,
confidential treatment may be afforded
to the records under exemption 8 of the
Freedom of Information Act (‘‘FOIA’’), 5
U.S.C. 552(b)(8). Comments should also
be sent to the Communications Division,
Office of the Comptroller of the
Currency, Mailstop 2–3, Attention:
1557–NEW, 250 E Street, SW.,
Washington, DC 20219. In addition,
comments may be sent by fax to (202)
874–5274 or by electronic mail to
regs.comments@occ.treas.gov
to the records under exemption 8 of the
Freedom of Information Act (‘‘FOIA’’), 5
U.S.C. 552(b)(8). Comments should also
be sent to the Communications Division,
Office of the Comptroller of the
Currency, Mailstop 2–3, Attention:
1557–NEW, 250 E Street, SW.,
Washington, DC 20219. In addition,
comments may be sent by fax to (202)
874–5274 or by electronic mail to
regs.comments@occ.treas.gov. You may
personally inspect and photocopy
comments at the OCC, 250 E Street,
SW., Washington, DC 20219. For
security reasons, the OCC requires that
visitors make an appointment to inspect
comments. You may do so by calling
(202) 874–4700. Upon arrival, visitors
will be required to present valid
government-issued photo identification
and to submit to security screening in
order to inspect and photocopy
comments. Additionally, please send a
copy of your comments by mail to: OCC
Desk Officer, 1557–NEW, U.S. Office of
Management and Budget, 725 17th
Street, NW., #10235, Washington, DC
20503, or by fax to (202) 395–6974. For
further information or to request a copy
of the OCC’s collection, please contact
Mary H. Gottlieb, OCC Clearance
Officer, (202) 874–5090, Legislative and
Regulatory Activities Division, OCC,
250 E Street, SW., Washington, DC
20219.
Board: For purposes of the PRA, this
information collection will be titled
Recordkeeping and Disclosure
Provisions Associated with Stress
Testing Guidance. The agency form
number for the collection is FR 4202.
The agency control number for this new
collection will be assigned by OMB.
This information collection is
authorized pursuant to sections 11(a),
11(i), 25, and 25A of the Federal Reserve
Act (12 U.S.C. 248(a), 248(i), 602, and
611), section 5 of the Bank Holding
Company Act (12 U.S.C. 1844), and
section 7(c) of the International Banking
Act (12 U.S.C. 3105(c)). The Board
expects to review the policies and
procedures for stress testing as part of
the Board’s supervisory process
collection is
authorized pursuant to sections 11(a),
11(i), 25, and 25A of the Federal Reserve
Act (12 U.S.C. 248(a), 248(i), 602, and
611), section 5 of the Bank Holding
Company Act (12 U.S.C. 1844), and
section 7(c) of the International Banking
Act (12 U.S.C. 3105(c)). The Board
expects to review the policies and
procedures for stress testing as part of
the Board’s supervisory process. To the
extent the Board collects information
during an examination of a banking
organization, confidential treatment
may be afforded to the records under
exemption 8 of the Freedom of
Information Act (‘‘FOIA’’), 5 U.S.C.
552(b)(8).
Comments on the collection of
information should be sent to Cynthia
Ayouch, Acting Federal Reserve Board
Clearance Officer, Division of Research
and Statistics, Mail Stop 95–A, Board of
Governors of the Federal Reserve
System, Washington, DC 20551, with
copies of such comments sent to the
Office of Management and Budget,
Paperwork Reduction Project (Docket
No. OP–1374), Washington, DC 20503.
Comments are invited on:
(1) Whether the proposed collection
of information is necessary for the
proper performance of the Federal
Reserve’s functions, including whether
the information has practical utility;
(2) The accuracy of the Federal
Reserve’s estimate of the burden of the
proposed information collection,
including the cost of compliance;
(3) Ways to enhance the quality,
utility, and clarity of the information to
be collected; and
lection
of information is necessary for the
proper performance of the Federal
Reserve’s functions, including whether
the information has practical utility;
(2) The accuracy of the Federal
Reserve’s estimate of the burden of the
proposed information collection,
including the cost of compliance;
(3) Ways to enhance the quality,
utility, and clarity of the information to
be collected; and
(4) Ways to minimize the burden of
information collection on respondents,
including through the use of automated
collection techniques or other forms of
information technology.
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
35077
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
1 See, for example, Supervision and Regulation
(SR) letter 10–6 or OCC Bulletin 2010–13 or FDIC
FIL–13–2010, ‘‘Interagency Policy Statement on
Funding and Liquidity Risk Management’’; SR 10–
1 or OCC Bulletin 2010–1 or FDIC FIL–2–2010,
‘‘Interagency Advisory on Interest Rate Risk’’; SR
letter 09–04, ‘‘Applying Supervisory Guidance and
Regulations on the Payment of Dividends, Stock
Redemptions, and Stock Repurchases at Bank
Holding Companies’’; SR letter 07–1, ‘‘Interagency
Guidance on Concentrations in Commercial Real
Estate’’ or OCC Bulletin 2006–46 or FDIC FIL–104–
2006, ‘‘Interagency Guidance on CRE Concentration
Risk Management’’; SR letter 99–18, ‘‘Assessing
Capital Adequacy in Relation to Risk at Large
Banking Organizations and Others with Complex
Risk Profiles’’; OCC Bulletin 2008–20 or FDIC FIL–
71–2008 ‘‘Supervisory Guidance: Supervisory
Review Process of Capital Adequacy (Pillar 2)
Related to the Implementation of the Basel II
Advanced Capital Framework’’; the Supervisory
Capital Assessment Program (see http://
www.federalreserve.gov/newsevents/press/bcreg/
bcreg20080715a1.pdf); and Comprehensive Capital
Analysis and Review: Objectives and Overview (see
www.federalreserve.g
IL–
71–2008 ‘‘Supervisory Guidance: Supervisory
Review Process of Capital Adequacy (Pillar 2)
Related to the Implementation of the Basel II
Advanced Capital Framework’’; the Supervisory
Capital Assessment Program (see http://
www.federalreserve.gov/newsevents/press/bcreg/
bcreg20080715a1.pdf); and Comprehensive Capital
Analysis and Review: Objectives and Overview (see
www.federalreserve.gov/newsevents/press/bcreg/
20110318a.htm).
2 Moreover, the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Pub. L. 111–203, 124
Stat. 1376) requires financial organizations with
more than $10 billion in total consolidated assets
to conduct a stress test at least annually. See
generally 12 U.S.C. 5365(i)(2).
FDIC: You may submit comments by
any of the following methods:
• Agency Web site: http://
www.FDIC.gov/regulations/laws/
federal/propose.html. Follow the
instructions for submitting comments.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail: comments@FDIC.gov.
Include ‘‘Stress Testing Guidance’’ in
the subject line of the message.
Comments received will be posted
without change to http://www.FDIC.gov/
regulations/laws/federal/propose.html,
including any personal information
provided.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments/Legal
ESS, Federal Deposit Insurance
Corporation, 550 17th Street, NW.,
Washington, DC 20429.
• Hand Delivery/Courier: Guard
station at the rear of the 550 17th Street
Building (located on F Street), on
business days between 7 a.m. and 5 p.m.
(EDT). Comments are invited on:
(1) Whether the proposed collection
of information is necessary for the
proper performance of the Federal
Reserve’s functions, including whether
the information has practical utility;
(2) The accuracy of the agencies’
estimate of the burden of the proposed
information collection, including the
cost of compliance;
n
business days between 7 a.m. and 5 p.m.
(EDT). Comments are invited on:
(1) Whether the proposed collection
of information is necessary for the
proper performance of the Federal
Reserve’s functions, including whether
the information has practical utility;
(2) The accuracy of the agencies’
estimate of the burden of the proposed
information collection, including the
cost of compliance;
(3) Ways to enhance the quality,
utility, and clarity of the information to
be collected; and
(4) Ways to minimize the burden of
information collection on respondents,
including through the use of automated
collection techniques or other forms of
information technology.
B. Regulatory Flexibility Act Analysis
Board:
While the guidance is not being
adopted as a rule, the Board has
considered the potential impact of the
proposed guidance on small banking
organizations in accordance with the
Regulatory Flexibility Act (5 U.S.C.
603(b)). For the reason discussed in the
Supplementary Information above, the
Board is issuing the proposed guidance
to emphasize the importance of stress
testing as an ongoing risk management
practice to support a banking
organization’s forward-looking
assessment of risks in order to better
equip such organization to address a
range of adverse outcomes. The
guidance provides an overview of how
a banking organization should structure
its stress testing activities to ensure they
fit into the organization’s overall risk
management program. The guidance
outlines broad principles for a
satisfactory stress testing framework,
and describes the manner in which a
banking organization should employ
stress testing as an integral component
of risk management. Based on its
analysis and for the reasons stated
below, the Board believes that the
proposed guidance will not have a
significant economic impact on a
substantial number of small entities
outlines broad principles for a
satisfactory stress testing framework,
and describes the manner in which a
banking organization should employ
stress testing as an integral component
of risk management. Based on its
analysis and for the reasons stated
below, the Board believes that the
proposed guidance will not have a
significant economic impact on a
substantial number of small entities.
Nevertheless, the Board is publishing an
initial regulatory flexibility analysis,
and seeking comment on whether the
proposed guidance would impose
undue burdens on, or have unintended
consequences for, small organizations.
Under regulations issued by the Small
Business Administration (‘‘SBA’’), a
small banking organization is defined as
a banking organization with total assets
of $175 million or less. See 13 CFR
121.201. The guidance being proposed
by the Board is intended for banking
organizations supervised by the
agencies with more than $10 billion in
total assets, including state member
banks, bank holding companies, and
U.S. branches and agencies of foreign
banking organizations. Banking
organizations that are subject to the
proposed guidance therefore
substantially exceed the $175 million
total asset threshold at which a banking
organization is considered a small
banking organization under SBA
regulations.
In light of the foregoing, the Board
does not believe that the proposed
guidance, if adopted in final form,
would have a significant economic
impact on a substantial number of small
entities. As noted above, the Board
specifically seeks comment on whether
the proposed guidance would impose
undue burdens on, or have unintended
consequences for, small organizations
and whether there are ways such
potential burdens or consequences
could be addressed in a manner
consistent with the guidance.
V
,
would have a significant economic
impact on a substantial number of small
entities. As noted above, the Board
specifically seeks comment on whether
the proposed guidance would impose
undue burdens on, or have unintended
consequences for, small organizations
and whether there are ways such
potential burdens or consequences
could be addressed in a manner
consistent with the guidance.
V. Proposed Guidance
The text of the proposed guidance is
as follows:
Office of the Comptroller of the
Currency
Federal Reserve System
Federal Deposit Insurance Corporation
Guidance on Stress Testing for Banking
Organizations With Total Consolidated
Assets of More Than $10 Billion
I. Introduction
All banking organizations should
have the capacity to understand fully
their risks and the potential impact of
stressful events and circumstances on
their financial condition. The U.S.
Federal banking agencies have
previously highlighted the use of stress
testing as a means to better understand
the range of a banking organization’s
potential risk exposures.1 The 2007–
2009 financial crisis further
underscored the need for banking
organizations to incorporate stress
testing into their risk management
practices, demonstrating that banking
organizations unprepared for stressful
events and circumstances can suffer
acute threats to their financial condition
and viability.2 The Federal Reserve, the
Office of the Comptroller of the
Currency, and the Federal Deposit
Insurance Corporation (collectively, the
‘‘agencies’’) are issuing this guidance to
emphasize the importance of stress
testing as an ongoing risk management
practice that supports banking
organizations’ forward-looking
assessment of risks and better equips
them to address a range of adverse
outcomes. This proposed joint guidance
is applicable to all institutions
supervised by the agencies with more
than $10 billion in total consolidated
assets
issuing this guidance to
emphasize the importance of stress
testing as an ongoing risk management
practice that supports banking
organizations’ forward-looking
assessment of risks and better equips
them to address a range of adverse
outcomes. This proposed joint guidance
is applicable to all institutions
supervised by the agencies with more
than $10 billion in total consolidated
assets. Specifically, with respect to the
OCC, these banking organizations would
include national banking associations
and Federal branches and agencies; with
respect to the Board, these banking
organizations would include state
member banks, bank holding
companies, and all other institutions for
which the Federal Reserve is the
primary Federal supervisor; with
respect to the FDIC, these banking
organizations would include state
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00125
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
35078
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
3 For purposes of this guidance, the term
‘‘concentrations’’ refers to groups of exposures and/
or activities that have the potential to produce
losses large enough to bring about a material change
in a banking organization’s risk profile or financial
condition.
nonmember insured banks or insured
branches of foreign banks.
Building upon previously issued
supervisory guidance that discusses the
uses and merits of stress testing in
specific areas of risk management, this
guidance provides an overview of how
a banking organization should structure
its stress testing activities and ensure
they fit into overall risk management
r financial
condition.
nonmember insured banks or insured
branches of foreign banks.
Building upon previously issued
supervisory guidance that discusses the
uses and merits of stress testing in
specific areas of risk management, this
guidance provides an overview of how
a banking organization should structure
its stress testing activities and ensure
they fit into overall risk management.
The guidance outlines broad principles
for a satisfactory stress testing
framework and describes the manner in
which stress testing should be employed
as an integral component of risk
management that is applicable at
various levels of aggregation within a
banking organization, as well as for
contributing to capital and liquidity
planning. While the guidance is not
intended to provide detailed
instructions for conducting stress testing
for any particular risk or business area,
the document describes several types of
stress testing activities and how they
may be most appropriately used by
banking organizations.
II. Overview of Stress Testing
Framework
For purposes of this guidance, stress
testing refers to exercises used to
conduct a forward-looking assessment
of the potential impact of various
adverse events and circumstances on a
banking organization. Stress testing
occurs at various levels of aggregation,
including on an enterprise-wide basis.
As outlined in section IV, there are
several approaches and applications for
stress testing and a banking organization
should consider the use of each in its
stress testing framework.
An effective stress testing framework
provides a comprehensive, integrated,
and forward-looking set of activities for
a banking organization to employ along
with other practices in order to assist in
the identification and measurement of
its material risks and vulnerabilities,
including those that may only manifest
themselves during stressful economic or
financial environments, or arise from
firm-specific adverse events
work
provides a comprehensive, integrated,
and forward-looking set of activities for
a banking organization to employ along
with other practices in order to assist in
the identification and measurement of
its material risks and vulnerabilities,
including those that may only manifest
themselves during stressful economic or
financial environments, or arise from
firm-specific adverse events. Such a
framework should supplement other
quantitative risk management practices,
such as those that rely primarily on
statistical estimates of risk or loss
estimates based on historical data, as
well as qualitative practices. In this
manner, stress testing can assist in
highlighting unidentified or under-
assessed risk concentrations and
interrelationships and their potential
impact on the banking organization
during times of stress.3
A banking organization should
develop and implement its stress testing
framework in a manner commensurate
with its size, complexity, business
activities, and overall risk profile. Its
stress testing framework should include
clearly defined objectives, well-
designed scenarios tailored to the
banking organization’s business and
risks, well-documented assumptions,
sound methodologies to assess potential
impact on the banking organization’s
financial condition, informative
management reports, ongoing and
effective review of stress testing
processes, and recommended actions
based on stress test results. Stress
testing should incorporate the use of
high-quality data to ensure that the
outputs are sufficiently credible to
support decision-making. Importantly, a
banking organization should have a
sound governance and control
infrastructure with objective, critical
review to ensure the stress testing
framework is functioning as intended
and recommended actions
based on stress test results. Stress
testing should incorporate the use of
high-quality data to ensure that the
outputs are sufficiently credible to
support decision-making. Importantly, a
banking organization should have a
sound governance and control
infrastructure with objective, critical
review to ensure the stress testing
framework is functioning as intended.
A stress testing framework should
allow a banking organization to conduct
consistent, repeatable exercises that
focus on its material risks, exposures,
activities, and strategies, and also
conduct ad hoc scenarios as needed.
The framework should consider the
impact of both firm-specific and
systemic stress events and
circumstances that are based on
historical experience as well as on
hypothetical occurrences that could
have an adverse impact on a banking
organization’s operations and financial
condition. Banking organizations
subject to this guidance should formally
review and assess the effectiveness of
their stress testing frameworks at least
once per year.
III. General Stress Testing Principles
A banking organization should
develop and implement an effective
stress testing framework as part of its
broader risk management and
governance processes. The framework
should include several activities and
exercises, and not just rely on any single
test or type of test, since every stress test
has limitations and relies on certain
assumptions
ear.
III. General Stress Testing Principles
A banking organization should
develop and implement an effective
stress testing framework as part of its
broader risk management and
governance processes. The framework
should include several activities and
exercises, and not just rely on any single
test or type of test, since every stress test
has limitations and relies on certain
assumptions.
The uses of a banking organization’s
stress testing framework should include,
but are not limited to, augmenting risk
identification and measurement;
estimating business line revenues and
losses and informing business line
strategies; identifying vulnerabilities
and assessing their potential impact;
assessing capital adequacy and
enhancing capital planning; assessing
liquidity adequacy and informing
contingency funding plans; contributing
to strategic planning; enabling senior
management to better integrate strategy,
risk management, and capital and
liquidity planning decisions; and
assisting with recovery planning. This
section describes general principles that
a banking organization should apply in
implementing such a framework.
Principle 1: A banking organization’s
stress testing framework should include
activities and exercises that are tailored
to and sufficiently capture the banking
organization’s exposures, activities, and
risks.
An effective stress testing framework
covers a banking organization’s full set
of material activities, exposures, and
risks, whether on or off the balance
sheet. The framework should also
address non-contractual sources of risks,
such as those related to a banking
organization’s reputation. Appropriate
coverage is important as stress test
results could give a false sense of
comfort if certain portfolios, exposures,
or business line activities are not
captured. Stress testing exercises should
be part of a banking organization’s
regular risk identification and
measurement activities
on-contractual sources of risks,
such as those related to a banking
organization’s reputation. Appropriate
coverage is important as stress test
results could give a false sense of
comfort if certain portfolios, exposures,
or business line activities are not
captured. Stress testing exercises should
be part of a banking organization’s
regular risk identification and
measurement activities. For example, in
assessing credit risk a banking
organization should evaluate the
potential impact of adverse outcomes,
such as an economic downturn or
declining asset values, on the condition
of its borrowers and counterparties, and
on the value of any supporting
collateral. As another example, in
assessing interest-rate risk, banking
organizations should analyze the effects
of significant interest rate shocks or
other yield-curve movements.
An effective stress testing framework
should be applied at various levels in
the banking organization, such as
business line, portfolio, and risk type, as
well as on an enterprise-wide basis. In
many cases, stress testing may be more
effective at business line and portfolio
levels, as a higher level of aggregation
may cloud or underestimate the
potential impact of adverse outcomes on
a banking organization’s financial
condition. In some cases, stress testing
can also be applied to individual
exposures or instruments. Each stress
test should be tailored to the relevant
level of aggregation, capturing critical
risk drivers, internal and external
influences, and other key considerations
at the relevant level.
Stress testing should capture the
interplay among different exposures,
activities, and risks and their combined
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00126
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
ation, capturing critical
risk drivers, internal and external
influences, and other key considerations
at the relevant level.
Stress testing should capture the
interplay among different exposures,
activities, and risks and their combined
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00126
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
35079
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
4 For purposes of this guidance, risk appetite is
defined as the level and type of risk an organization
is able and willing to assume in its exposures and
business activities, given its business objectives and
obligations to stakeholders. See Senior Supervisors
Group report, ‘‘Observations on Developments in
Risk Appetite Frameworks and IT Infrastructure,’’
December 2010 (see http://www.newyorkfed.org/
newsevents/news/banking/2010/an101223.pdf).
effects. While stress testing several types
of risks or business lines simultaneously
may prove operationally challenging, a
banking organization should aim to
identify common risk drivers across risk
types and business lines that can
adversely affect its financial condition.
Accordingly, stress tests should provide
a banking organization with the ability
to identify potential concentrations—
including those that may not be readily
observable during benign periods and
whose sensitivity to a common set of
factors is apparent only during times of
stress—and to assess the impact of
identified concentrations of exposures,
activities, and risks within and across
portfolios and business lines.
Stress testing should be tailored to the
banking organization’s idiosyncrasies
and specific business mix and include
all major business lines and significant
individual counterparties
to a common set of
factors is apparent only during times of
stress—and to assess the impact of
identified concentrations of exposures,
activities, and risks within and across
portfolios and business lines.
Stress testing should be tailored to the
banking organization’s idiosyncrasies
and specific business mix and include
all major business lines and significant
individual counterparties. For example,
a banking organization that is
geographically concentrated may
determine that a certain segment of its
business may be more adversely affected
by shocks to economic activity at the
state or local level than by a severe
national recession. On the other hand, if
the banking organization has significant
global operations, it should consider
scenarios that have an international
component and stress conditions that
could affect the different aspects of its
operations in different ways, as well as
conditions that could adversely affect
all of its operations at the same time.
A banking organization should use its
stress testing framework to determine
whether exposures, activities, and risks
are aligned with the banking
organization’s risk appetite.4 A banking
organization can use stress testing to
help inform decisions about its strategic
direction and/or risk appetite by better
understanding the risks of its exposures
or of engaging in certain business
practices. For example, if a banking
organization pursues a business strategy
for a new or modified product, and the
banking organization does not have
long-standing experience with that
product or lacks extensive data, the
banking organization can use stress
testing to identify the product’s
potential downsides and unanticipated
risks. Scenarios used in a banking
organization’s stress tests should be
relevant to the direction and strategy set
by its board of directors, as well as
sufficiently severe to be credible to
internal and external stakeholders
perience with that
product or lacks extensive data, the
banking organization can use stress
testing to identify the product’s
potential downsides and unanticipated
risks. Scenarios used in a banking
organization’s stress tests should be
relevant to the direction and strategy set
by its board of directors, as well as
sufficiently severe to be credible to
internal and external stakeholders.
Principle 2: An effective stress testing
framework employs multiple
conceptually sound stress testing
activities and approaches.
All estimates of risk, including stress
tests, have an element of uncertainty
due to assumptions, limitations, and
other factors associated with using past
performance measures and forward-
looking estimates. Banking
organizations should, therefore, use
multiple stress testing activities and
approaches (consistent with section IV),
and ensure that each is conceptually
sound. Stress tests usually vary in
design and complexity, including the
number of factors employed and the
degree of stress applied. A banking
organization should ensure that the
complexity of any given test does not
undermine its integrity, usefulness, or
clarity. In many cases, relatively simple
tests can be very useful and informative.
Additionally, effective stress testing
relies on high-quality input data and
information to produce credible
outcomes. A banking organization
should ensure that it has readily
available data and other information for
the types of stress tests it uses,
including key variables that drive
performance. In addition, a banking
organization should have appropriate
management information systems (MIS)
and data processes that enable it to
collect, sort, aggregate, and update data
and other information efficiently and
reliably within business lines and across
the banking organization for use in
stress testing
the types of stress tests it uses,
including key variables that drive
performance. In addition, a banking
organization should have appropriate
management information systems (MIS)
and data processes that enable it to
collect, sort, aggregate, and update data
and other information efficiently and
reliably within business lines and across
the banking organization for use in
stress testing. If certain data and
information are not current or not
available, a banking organization should
analyze the stress test outputs with an
understanding of those data limitations.
A banking organization should also
document the assumptions used in its
stress tests and note the degree of
uncertainty that may be incorporated
into the tools used for stress testing. In
some cases, it may be appropriate to
present and analyze test results not just
in terms of point estimates, but also
including the potential margin of error
or statistical uncertainty around the
estimates. Furthermore, almost all stress
tests, including well-developed
quantitative tests supported by high-
quality data, employ a certain amount of
expert or business judgment; the role
and impact of such judgment should be
clearly documented. In some cases,
when credible data are lacking and more
quantitative tests are operationally
challenging or in the early stages of
development, a banking organization
may choose to employ more
qualitatively based tests, provided that
the tests are properly documented and
their assumptions are transparent.
Regardless of the type of stress tests
used, a banking organization should
understand and clearly document all
assumptions, uncertainties, and
limitations, and provide that
information to users of the stress testing
results.
Principle 3: An effective stress testing
framework is forward-looking and
flexible
ed that
the tests are properly documented and
their assumptions are transparent.
Regardless of the type of stress tests
used, a banking organization should
understand and clearly document all
assumptions, uncertainties, and
limitations, and provide that
information to users of the stress testing
results.
Principle 3: An effective stress testing
framework is forward-looking and
flexible.
A stress testing framework should be
sufficiently dynamic and flexible to
incorporate changes in a banking
organization’s on- and off-balance-sheet
activities, portfolio composition, asset
quality, operating environment,
business strategy, and other risks that
may arise over time from firm-specific
events, macroeconomic and financial
market developments, or some
combination of these events. A banking
organization should also ensure that its
MIS are capable of incorporating
relatively rapid changes in exposures,
activities, and risks.
While stress testing should utilize
available historical information, a
banking organization should look
beyond assumptions based only on
historical data and challenge
conventional assumptions. A banking
organization should ensure that it is not
constrained by past experience and that
it considers a multiple scenarios, even
scenarios that have not occurred in the
recent past or during the banking
organization’s history. For example, a
banking organization should not assume
that if it has suffered no or minimal
losses in a certain business line or
product that such a pattern will
continue. Structural changes in
customer, product, and financial
markets can present unprecedented
situations for a banking organization. A
banking organization with any type of
significant concentration can be
particularly vulnerable to rapid changes
in economic and financial conditions
and should try to identify and better
understand the impact of those
vulnerabilities in advance
will
continue. Structural changes in
customer, product, and financial
markets can present unprecedented
situations for a banking organization. A
banking organization with any type of
significant concentration can be
particularly vulnerable to rapid changes
in economic and financial conditions
and should try to identify and better
understand the impact of those
vulnerabilities in advance. For example,
the risks related to residential mortgages
were underestimated for a number of
years by a large number of banking
organizations, and those risks
eventually affected the banking
organizations in a variety of ways.
Effective stress testing can help a
banking organization identify any such
concentrations and help understand the
potential impact of several key aspects
of the business being exposed to
common drivers.
Stress testing should be conducted
over various relevant time horizons to
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00127
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
35080
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
adequately capture both conditions that
may materialize in the near term and
adverse situations that take longer to
develop. For example, when a banking
organization stress tests a portfolio for
market and credit risks simultaneously,
it should consider that certain credit
risk losses may take longer to
materialize than market risk losses, and
also that the severity and speed of mark-
to-market losses may create significant
vulnerabilities for the firm, even if a
more fundamental analysis of how
realized losses may play out over time
seems to show less threatening results.
A banking organization should carefully
consider the incremental and
cumulative effects of stress conditions,
particularly with respect to potential
interactions among exposures, activities,
and risks and possible second-order or
‘‘knock-on’’ effects
ies for the firm, even if a
more fundamental analysis of how
realized losses may play out over time
seems to show less threatening results.
A banking organization should carefully
consider the incremental and
cumulative effects of stress conditions,
particularly with respect to potential
interactions among exposures, activities,
and risks and possible second-order or
‘‘knock-on’’ effects.
In addition to conducting formal,
routine stress tests, a banking
organization should have the flexibility
to conduct new or ad hoc stress tests in
a timely manner to address rapidly
emerging risks. These less routine tests
usually can be conducted in a short
amount of time and may be simpler and
less extensive than a banking
organization’s more formal, regular
tests. However, for its ad hoc tests, a
banking organization should still have
the capacity to bring together
approximated information on risks,
exposures, and activities and assess
their impact.
More broadly, a banking organization
should continue updating and
maintaining its stress testing framework
in light of new risks, better
understanding of the banking
organization’s exposures and activities,
new stress testing techniques, and any
changes in its operating structure and
environment. A banking organization’s
stress testing development should be
iterative, with ongoing adjustments and
refinements to better calibrate the tests
to provide current and relevant
information. Banking organizations
should document the ongoing
development of their stress testing
practices.
Principle 4: Stress test results should
be clear, actionable, well supported, and
inform decision-making.
Stress testing should incorporate
measures that adequately and effectively
convey results of the impact of adverse
outcomes
ibrate the tests
to provide current and relevant
information. Banking organizations
should document the ongoing
development of their stress testing
practices.
Principle 4: Stress test results should
be clear, actionable, well supported, and
inform decision-making.
Stress testing should incorporate
measures that adequately and effectively
convey results of the impact of adverse
outcomes. Such measures may include,
for example, changes to asset values,
accounting and economic profit and
loss, revenue streams, liquidity levels,
cash flows, regulatory capital, risk-
weighted assets, loan loss provisions,
internal capital estimates, levels of
problem assets, breaches in covenants or
key trigger levels, or other relevant
measures. Stress test measures should
be tailored to the type of test and the
particular level at which the test is
applied (for example, at the business
line or risk level). Some stress tests may
require using a range of measures to
evaluate the full impact of certain
events, such as a severe systemic event.
In addition, all stress test results should
be accompanied by descriptive and
qualitative information (such as key
assumptions and limitations) to allow
users to interpret the exercises in
context. The analysis and the process
should be well documented so that
stress testing processes can be replicated
if need be.
A banking organization should
regularly communicate stress test results
to appropriate levels within the banking
organization to foster dialogue around
stress testing, to keep the board of
directors, management, and staff
apprised, and to inform stress testing
approaches, results, and decisions in
other areas of the banking organization.
A banking organization should maintain
an internal summary of test results to
document at a high level the range of its
stress testing activities and outcomes, as
well as proposed follow-up actions
ound
stress testing, to keep the board of
directors, management, and staff
apprised, and to inform stress testing
approaches, results, and decisions in
other areas of the banking organization.
A banking organization should maintain
an internal summary of test results to
document at a high level the range of its
stress testing activities and outcomes, as
well as proposed follow-up actions. In
addition, management should review
stress testing activities on a regular basis
to determine, among other things, the
validity of the assumptions, the severity
of tests, the robustness of the estimates,
the performance of any underlying
models, and the stability and
reasonableness of the results.
Stress test results should inform
analysis and decision-making related to
business strategies, limits, risk profile,
and other aspects of risk management,
consistent with the banking
organization’s established risk appetite.
A banking organization should review
the results of its various stress tests with
the strengths and limitations of each test
in mind (consistent with Principle 2),
determine which results should be
given greater or lesser weight, analyze
the combined impact of its tests, and
then evaluate potential courses of action
based on that analysis. A banking
organization may decide to maintain its
current course based on test results;
indeed, the results of highly severe
stress tests need not always indicate that
immediate action has to be taken.
Wherever possible, tools such as
benchmarking or other comparative
analysis should be used to evaluate the
stress testing results relative to other
tools and measures, both internal and
external to the banking organization, to
provide proper context and a check on
results.
IV. Stress Testing Approaches and
Applications
This section discusses some general
types of stress testing approaches and
applications. For any type of stress test,
banking organizations should indicate
the specific purpose and the focus of the
test
ive to other
tools and measures, both internal and
external to the banking organization, to
provide proper context and a check on
results.
IV. Stress Testing Approaches and
Applications
This section discusses some general
types of stress testing approaches and
applications. For any type of stress test,
banking organizations should indicate
the specific purpose and the focus of the
test. Defining the scope of a given stress
test is also important, whether it applies
at the portfolio, business line, risk type,
or enterprise-wide level, or even just for
an individual exposure. Based on the
purpose and scope of the test, different
stress testing techniques are most
useful. Thus, a banking organization
should employ several stress testing
approaches and applications, as needed.
Among them should be approaches or
applications such as scenario analysis,
sensitivity analysis, enterprise-wide
stress testing, and reverse stress testing.
Consistent with Principle 1, banking
organizations should apply these
commensurate with their size,
complexity, and business profile, and
may not need to incorporate all of the
details described below. Consistent with
Principle 3, banking organizations
should also recognize that stress testing
approaches will evolve over time and
they should update their practices as
needed.
Scenario Analysis
Scenario analysis refers to a type of
stress testing in which a banking
organization applies historical or
hypothetical scenarios to assess the
impact of various events and
circumstances, including extreme ones.
Scenarios usually involve some kind of
coherent, logical narrative or ‘‘story’’ as
to why certain events and circumstances
are occurring and in which combination
and order, such as a severe recession,
failure of a major counterparty, loss of
major clients, natural or man-made
disaster, localized economic downturn,
or a sudden change in interest rates
brought about by unfavorable inflation
developments
lly involve some kind of
coherent, logical narrative or ‘‘story’’ as
to why certain events and circumstances
are occurring and in which combination
and order, such as a severe recession,
failure of a major counterparty, loss of
major clients, natural or man-made
disaster, localized economic downturn,
or a sudden change in interest rates
brought about by unfavorable inflation
developments. Scenario analysis can be
applied at various levels of the banking
organization, such as within individual
business lines to help identify factors
that could harm those business lines
most.
Stress scenarios should reflect a
banking organization’s unique
vulnerabilities to factors that affect its
exposures, activities, and risks. For
example, if a banking organization is
concentrated in a particular line of
business, such as commercial real estate
or residential mortgage lending, it
would be appropriate to explore the
impact of a downturn in those particular
market segments. Similarly, a banking
organization with lending
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00128
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
35081
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
concentrations to oil and gas companies
should include scenarios related to the
energy sector. Other relevant factors to
be considered in scenario analysis relate
to reputational and legal risks to a
banking organization, such as an
existing major lawsuit, potential
litigation, or a situation when a banking
organization feels compelled to provide
support to an affiliate or provide other
types of non-contractual support to
avoid reputational damage. Scenarios
should be internally consistent and
portray realistic outcomes based on
underlying relationships among
variables, and should include only those
mitigating developments that are
consistent with the scenario
or a situation when a banking
organization feels compelled to provide
support to an affiliate or provide other
types of non-contractual support to
avoid reputational damage. Scenarios
should be internally consistent and
portray realistic outcomes based on
underlying relationships among
variables, and should include only those
mitigating developments that are
consistent with the scenario.
Additionally, a banking organization
should consider the best manner to try
to capture combinations of stressful
events and circumstances, including
second-order and ‘‘knock-on’’ effects.
Ultimately, a banking organization
should select and design multiple
scenarios that are relevant to its profile
and make intuitive sense, use enough
scenarios to explore the range of
potential outcomes, and ensure that the
scenarios continue to be timely.
A banking organization may apply
scenario analysis within the context of
its existing risk measurement tools (e.g.,
the impact of a severe decline in market
prices on a banking organization’s
value-at-risk (VaR) measure) or use it as
an alternative, supplemental measure.
For instance, a banking organization
may use scenario analysis to measure
the impact of a severe financial market
disturbance and compare those results
to what is produced by its VaR or other
measures. This type of scenario analysis
should account for known shortcomings
of other risk measurement frameworks.
For example, market risk VaR models
generally assume liquid markets with
known prices. Scenario analysis could
shed light on the effects of a breakdown
in liquidity and valuation difficulties.
One of the key challenges with
scenario analysis is to translate a
scenario into balance sheet impact,
changes in risk measures, potential
losses, or other measures of adverse
financial impact, which would vary
depending on the test design and the
type of scenario used
known prices. Scenario analysis could
shed light on the effects of a breakdown
in liquidity and valuation difficulties.
One of the key challenges with
scenario analysis is to translate a
scenario into balance sheet impact,
changes in risk measures, potential
losses, or other measures of adverse
financial impact, which would vary
depending on the test design and the
type of scenario used. For some aspects
of scenario analysis, banking
organizations may use econometric or
similar types of analysis to estimate a
relationship between some underlying
factors or drivers and risk estimates or
loss projections based on a given data
set, and then extrapolate to see the
impact of more severe inputs. Care
should be taken not to make
assumptions that relationships from
benign or mildly adverse times will
hold during more severe times or that
estimating such relationships is
relatively straightforward. For example,
linear relationships between risk drivers
and losses may become nonlinear
during times of stress.
Sensitivity Analysis
Sensitivity analysis refers to a banking
organization’s assessment of its
exposures, activities, and risks when
certain variables, parameters, and inputs
are ‘‘stressed’’ or ‘‘shocked.’’ A key goal
of sensitivity analysis is to test the
impact of assumptions on outcomes.
Generally, sensitivity analysis differs
from scenario analysis in that it involves
changing variables, parameters, or
inputs without an explicit underlying
reason or narrative, in order to explore
what occurs under a range of inputs and
at extreme or highly adverse levels. In
this type of analysis a banking
organization may realize, for example,
that a given relationship is much more
difficult to estimate at extreme levels.
A banking organization may apply
sensitivity analysis at various levels of
aggregation to estimate the impact from
a change in one or more key variables
xplore
what occurs under a range of inputs and
at extreme or highly adverse levels. In
this type of analysis a banking
organization may realize, for example,
that a given relationship is much more
difficult to estimate at extreme levels.
A banking organization may apply
sensitivity analysis at various levels of
aggregation to estimate the impact from
a change in one or more key variables.
The results may help a banking
organization better understand the range
of outcomes from some of its models,
such as developing a distribution of
output based on a variety of extreme
inputs. For example, a banking
organization may choose to calculate a
range of changes to a structured
security’s overall value using a range of
different assumptions about the
performance and linkage of underlying
cash flows. Sensitivity analysis should
be conducted periodically due to
potential changes in a banking
organization’s exposures, activities,
operating environment, or the
relationship of variables to one another.
Sensitivity analysis can also help to
assess a combined impact on a banking
organization of several variables,
parameters, factors, or drivers. For
example, a banking organization could
better understand the impact on its
credit losses from a combined increase
in default rates and a decrease in
collateral values. A banking
organization could also explore the
impact of highly adverse capitalization
rates, declines in net operating income,
and reductions in collateral when
evaluating its risks from commercial
real estate exposures. Sensitivity
analysis can be especially useful
because it is not necessarily
accompanied by a particular narrative or
scenario; that is, sensitivity analysis can
provide banking organizations more
flexibility to explore the impact of
potential stresses that they may not be
able to capture in designed scenarios
in collateral when
evaluating its risks from commercial
real estate exposures. Sensitivity
analysis can be especially useful
because it is not necessarily
accompanied by a particular narrative or
scenario; that is, sensitivity analysis can
provide banking organizations more
flexibility to explore the impact of
potential stresses that they may not be
able to capture in designed scenarios.
Furthermore, banking organizations may
decide to conduct sensitivity analysis of
their scenarios, i.e., choosing different
levels or paths of variables to
understand the sensitivities of choices
made during scenario design. For
instance, banking organizations may
decide to apply a few different interest-
rate paths for a given scenario.
Enterprise-Wide Stress Testing
Enterprise-wide stress testing is an
application of stress testing that
involves assessing the impact of certain
specified scenarios on the banking
organization as a whole, particularly on
capital and liquidity. As is the case with
scenario analysis more generally,
enterprise-wide stress testing involves
robust scenario design and effective
translation of scenarios into measures of
impact. Enterprise-wide stress tests can
help a banking organization in its efforts
to assess the impact of its full set of risks
under adverse events and
circumstances, but should be
supplemented with other stress tests
and other risk measurement tools given
inherent limitations in capturing all
risks and all adverse outcomes in one
test.
Scenario design for enterprise-wide
stress testing involves developing
scenarios that affect the banking
organization as a whole that stem from
macroeconomic, market-wide, and firm-
specific events. These scenarios should
incorporate the potential simultaneous
occurrence of both firm-specific and
macroeconomic and market-wide
events, considering system-wide
interactions and feedback effects
nario design for enterprise-wide
stress testing involves developing
scenarios that affect the banking
organization as a whole that stem from
macroeconomic, market-wide, and firm-
specific events. These scenarios should
incorporate the potential simultaneous
occurrence of both firm-specific and
macroeconomic and market-wide
events, considering system-wide
interactions and feedback effects. For
example, price shocks may lead to
significant portfolio losses, rising
funding gaps, a ratings downgrade, and
diminished access to funding. In
general, it is a good practice to consult
with a large set of individuals within
the banking organization—in various
business lines, research and risk areas—
to gain a wide perspective on how
enterprise-wide scenarios should be
designed and to ensure that the
scenarios capture the relevant aspects of
the banking organization’s business and
risks. Banking organizations should also
conduct scenarios of varying severity to
gauge the relative impact. At least some
scenarios should be of sufficient
severity to challenge the viability of the
banking organization, and should
include instant market shocks and
stressful periods of extensive duration
(e.g., not just a one or two-quarter shock
after which conditions return to
normal).
Selection of scenario variables is
important for enterprise-wide tests,
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00129
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
hould
include instant market shocks and
stressful periods of extensive duration
(e.g., not just a one or two-quarter shock
after which conditions return to
normal).
Selection of scenario variables is
important for enterprise-wide tests,
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00129
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
35082
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
5 The portions of this guidance related to capital
stress testing do not apply to U.S. branches and
agencies of foreign banking organizations.
6 In this manner, stress testing can form an
integral part of an organization’s internal capital
adequacy process, consistent with supervisory
standards outlined in SR letter 09–04, SR letter 99–
18, OCC Bulletin 2008–20 or FDIC FIL–71–2008
‘‘Supervisory Guidance: Supervisory Review
Process of Capital Adequacy (Pillar 2) Related to the
Implementation of the Basel II Advanced Capital
Framework.’’
because they generally serve as the link
between the overall narrative of the
scenario and tangible impact on the
banking organization as a whole. For
instance, in aiming to capture the
combined impact of a severe recession
and a financial market downturn, a
banking organization may choose a set
of variables such as changes in GDP,
unemployment rate, interest rates, stock
market levels, or home price levels.
However, particularly when assessing
the impact on the whole banking
organization, using a large number of
variables can make a test more
cumbersome and complicated—so a
banking organization may also benefit
from simpler scenarios or from those
with fewer variables. Banking
organizations should balance the
comprehensiveness of contributing
variables and tractability of the exercise.
As with scenario analysis generally,
translating scenarios into tangible
effects on the banking organization as a
whole presents certain challenges
rsome and complicated—so a
banking organization may also benefit
from simpler scenarios or from those
with fewer variables. Banking
organizations should balance the
comprehensiveness of contributing
variables and tractability of the exercise.
As with scenario analysis generally,
translating scenarios into tangible
effects on the banking organization as a
whole presents certain challenges. An
institution should identify appropriate
and meaningful mechanisms for
translating scenarios into relevant
internal risk parameters that provide a
banking organization-wide view of risks
and understanding of how the risks are
translated into loss estimates. Not all
business areas are equally affected by a
given scenario, and problems in one
business area can have effects on other
units. However, for an enterprise-wide
test, assumptions across business lines
and risk areas should remain constant
for the chosen scenario, since the
objective is to see how the banking
organization as a whole responds to a
common outcome.
Reverse Stress Testing
Reverse stress testing is a tool that
allows a banking organization to assume
a known adverse outcome, such as
suffering a credit loss that breaches
regulatory capital ratios or suffering
severe liquidity constraints making it
unable to meet its obligations, and then
deduce the types of events that could
lead to such an outcome. This type of
stress testing may help a banking
organization to consider scenarios
beyond its normal business expectations
and see the impact of severe systemic
effects on the banking organization. It
also allows a banking organization to
challenge common assumptions about
its performance and expected mitigation
strategies.
Reverse stress testing helps to explore
so-called ‘‘break the bank’’ situations,
allowing a banking organization to set
aside the issue of estimating the
likelihood of severe events and to focus
more on what kinds of events could
threaten the viability of the banking
organization
nking organization to
challenge common assumptions about
its performance and expected mitigation
strategies.
Reverse stress testing helps to explore
so-called ‘‘break the bank’’ situations,
allowing a banking organization to set
aside the issue of estimating the
likelihood of severe events and to focus
more on what kinds of events could
threaten the viability of the banking
organization. Reverse stress testing
helps a banking organization evaluate
the combined effect of several types of
extreme events and circumstances that
might threaten the survival of the
banking organization, even if in
isolation each of the effects might be
manageable. For instance, reverse stress
testing may help a banking organization
recognize that a certain level of
unemployment would have a severe
impact on credit losses, that a market
disturbance could create additional
losses and result in rising funding costs,
and that a firm-specific case of fraud
would cause even further losses and
reputational impact that could threaten
a banking organization’s viability. In
some cases, reverse stress tests could
reveal to a banking organization that
‘‘breaking the bank’’ is not as remote an
outcome as originally thought.
Given the numerous potential threats
to a banking organization’s viability, the
organization should ensure that it
focuses first on those scenarios that
have the largest firm-wide impact, such
as insolvency or illiquidity, but also on
those that seem most imminent given
the current environment. Focusing on
the most prominent vulnerabilities
helps a banking organization prioritize
its choice of scenarios for reverse stress
testing. However, a banking
organization should also consider a
wider range of possible scenarios that
could jeopardize the viability of the
banking organization, exploring what
could represent potential blind spots.
V. Stress Testing for Assessing the
Adequacy of Capital and Liquidity
There are many uses of stress testing
within banking organizations
oice of scenarios for reverse stress
testing. However, a banking
organization should also consider a
wider range of possible scenarios that
could jeopardize the viability of the
banking organization, exploring what
could represent potential blind spots.
V. Stress Testing for Assessing the
Adequacy of Capital and Liquidity
There are many uses of stress testing
within banking organizations.
Prominent among these are stress tests
designed to assess the adequacy of
capital and liquidity. Given the
importance of capital and liquidity to a
banking organization’s viability, stress
testing should be applied in these two
areas in particular, including an
evaluation of the interaction between
capital and liquidity and the potential
for both to become impaired at the same
time. Depletions and shortages of capital
or liquidity can cause a banking
organization to no longer perform
effectively as a financial intermediary,
be viewed by its counterparties as no
longer viable, become insolvent, or
diminish its capacity to meet legal and
financial obligations. A banking
organization’s capital and liquidity
stress testing should consider how
earnings, capital, and liquidity would be
affected in an environment in which
multiple risks manifest themselves at
the same time, for example, an increase
in credit losses during an adverse
interest-rate environment. Additionally,
banking organizations should recognize
that at the end of the time horizon
considered by a given stress test, the
banking organization may still have
substantial residual risks or problem
exposures that may continue to pressure
capital and liquidity resources.
Stress testing for capital and liquidity
adequacy should be conducted in
coordination with a banking
organization’s overall strategy and
annual planning cycles. Results should
be refreshed in the event of major
strategic decisions, or other decisions
that can materially impact capital or
liquidity
risks or problem
exposures that may continue to pressure
capital and liquidity resources.
Stress testing for capital and liquidity
adequacy should be conducted in
coordination with a banking
organization’s overall strategy and
annual planning cycles. Results should
be refreshed in the event of major
strategic decisions, or other decisions
that can materially impact capital or
liquidity. Banking organizations should
conduct stress testing for capital and
liquidity adequacy periodically.
Capital Stress Testing 5
Capital stress testing results can serve
as a useful tool to support a banking
organization’s capital planning and
corporate governance.6 They may help a
banking organization better understand
its risks and evaluate the impact of
adverse outcomes on its capital position
and ensure that the banking
organization holds adequate capital
given its business model, including the
complexity of its activities and its risk
profile. Capital stress testing
supplements a banking organization’s
regulatory capital analysis by providing
a forward-looking assessment of capital
adequacy, usually with a forecast
horizon of at least two years, and
highlighting the potential adverse
effects on capital levels and ratios of
risks not fully captured in regulatory
capital requirements. It should also be
used to help a banking organization
assess the quality and composition of
capital and its ability to absorb losses.
Stress testing can aid capital
contingency planning by helping
management identify exposures or risks
that would need to be reduced and
actions that could be taken to bolster
capital levels or otherwise maintain
capital adequacy, as well as actions that
in times of stress might not be
possible—such as raising capital
he quality and composition of
capital and its ability to absorb losses.
Stress testing can aid capital
contingency planning by helping
management identify exposures or risks
that would need to be reduced and
actions that could be taken to bolster
capital levels or otherwise maintain
capital adequacy, as well as actions that
in times of stress might not be
possible—such as raising capital.
A capital stress testing framework
should include exercises that analyze
the potential for changes in earnings,
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00130
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
35083
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
7 For regulated subsidiaries, stress testing
activities should be fully consistent with the
regulations and guidance of the relevant primary
Federal supervisor.
8 See SR letter 10–6, OCC Bulletin 2010–13, OCC
Bulletin 2010–1, and SR letter 10–1.
losses, reserves, and other potential
effects on capital under a variety of
stressful circumstances. The framework
should also capture any potential
change in risk-weighted assets, the
ability of capital to absorb losses, and
any resulting impact on the banking
organization’s capital ratios. The
framework should include all relevant
risk types that have a potential to affect
capital adequacy, whether directly or
indirectly. A banking organization
should also explore the potential for
possible balance sheet expansion to put
pressure on capital ratios and consider
mitigation options, other than simply
shrinking the balance sheet. Capital
stress testing should assess the potential
impact of a banking organization’s
material subsidiaries suffering capital
problems on their own, even if the
consolidated banking organization is not
encountering problems.7
Enterprise-wide stress testing, as
described in section IV, should be an
integral part of a banking organization’s
capital stress testing
rinking the balance sheet. Capital
stress testing should assess the potential
impact of a banking organization’s
material subsidiaries suffering capital
problems on their own, even if the
consolidated banking organization is not
encountering problems.7
Enterprise-wide stress testing, as
described in section IV, should be an
integral part of a banking organization’s
capital stress testing. Such enterprise-
wide testing should include pro forma
estimates of not only potential losses
and resources available to absorb losses,
but also potential planned capital
actions (such as dividends or share
repurchases) that would affect the
banking organization’s capital position,
including regulatory and other capital
ratios. There should also be
consideration of the impact on the
banking organization’s provision for
loan and lease losses and other relevant
financial metrics. Even with very
effective enterprise-wide tests, banking
organizations should use capital stress
testing in conjunction with other
internal approaches (in addition to
regulatory measures) for assessing
capital adequacy, such as those that rely
primarily on statistical estimates of risk
or loss estimates based on historical
data.
Liquidity Stress Testing
A banking organization should also
conduct stress testing for liquidity
adequacy.8 Through such stress testing
a banking organization can work to
identify vulnerabilities related to
liquidity adequacy in light of both firm-
specific and market-wide stress events
and circumstances. Effective stress
testing helps a banking organization
identify and quantify the depth, source,
and degree of potential liquidity strain
and to analyze possible impacts on its
cash flows, liquidity position,
profitability, and other aspects of its
financial condition over various time
horizons
uidity adequacy in light of both firm-
specific and market-wide stress events
and circumstances. Effective stress
testing helps a banking organization
identify and quantify the depth, source,
and degree of potential liquidity strain
and to analyze possible impacts on its
cash flows, liquidity position,
profitability, and other aspects of its
financial condition over various time
horizons. For example, stress testing can
be used to explore potential funding
shortfalls, shortages in liquid assets, the
inability to issue debt, exposure to
possible deposit outflows, volatility in
short-term brokered deposits, and the
impact of reduced collateral values on
borrowing capacity at the Federal Home
Loan Banks, the Federal Reserve
discount window, or other secured
wholesale funding sources.
Liquidity stress testing should explore
the potential impact of adverse
developments that may affect market
and asset liquidity, including the
freezing up of credit and funding
markets, and the corresponding impact
on the banking organization. Such tests
can also help identify the conditions
under which balance sheets might
expand, thus creating additional
funding needs (e.g., through accelerated
drawdowns on unfunded
commitments). These tests also help
determine whether the banking
organization has a sufficient liquidity
buffer to meet various types of future
liquidity demands. In this regard,
liquidity stress testing should be an
integral part of the development and
maintenance of a banking organization’s
contingency funding planning.
Liquidity stress testing should include
enterprise-wide tests as discussed in
section IV, but should also be applied,
as appropriate, at lower levels of the
banking organization, particularly for
entities that might face regulatory
restrictions or limitations on receiving
or providing funds. As with capital
stress testing, banking organizations
may need to conduct liquidity stress
tests at both the consolidated and
subsidiary level
prise-wide tests as discussed in
section IV, but should also be applied,
as appropriate, at lower levels of the
banking organization, particularly for
entities that might face regulatory
restrictions or limitations on receiving
or providing funds. As with capital
stress testing, banking organizations
may need to conduct liquidity stress
tests at both the consolidated and
subsidiary level. In undertaking
enterprise-wide liquidity tests banking
organizations should make realistic
assumptions as to the implications of
liquidity stresses in one part of the
banking organization on other parts.
An effective stress testing framework
should explore the potential for capital
and liquidity problems to arise at the
same time or exacerbate one another.
For example, a banking organization in
a stressed liquidity position is often
required to take actions that have a
negative direct or indirect capital
impact (e.g., selling assets at a loss or
incurring funding costs at above market
rates to meet funding needs). A banking
organization’s liquidity stress analysis
should explore situations in which the
banking organization may be operating
with a capital position that exceeds
regulatory minimums, but is
nonetheless viewed within the financial
markets or by its counterparties as being
of questionable viability. As with other
applications of stress testing, for its
capital and liquidity stress tests, it is
beneficial for a banking organization to
articulate clearly its objectives for a
post-stress outcome, for instance to
remain a viable financial market
participant that is able to meet its
existing and prospective obligations and
commitments.
VI. Governance
Similar to other aspects of its risk
management, a banking organization’s
stress testing framework will be
effective only if it is subject to strong
governance and controls to ensure the
framework is functioning as intended
s outcome, for instance to
remain a viable financial market
participant that is able to meet its
existing and prospective obligations and
commitments.
VI. Governance
Similar to other aspects of its risk
management, a banking organization’s
stress testing framework will be
effective only if it is subject to strong
governance and controls to ensure the
framework is functioning as intended.
Strong governance and controls help
ensure that the framework contains core
elements, from clearly defined stress
testing objectives to recommended
actions. Importantly, strong governance
provides critical review of elements of
the stress testing framework, especially
regarding key assumptions,
uncertainties, and limitations. A
banking organization should ensure that
the stress testing framework is not
isolated within a banking organization’s
risk management function, but is firmly
integrated into business lines, capital
and asset-liability committees, and other
decision-making bodies. The extent and
sophistication of a banking
organization’s governance over its stress
testing framework should align with the
extent and sophistication of that
framework.
Governance over a banking
organization’s stress testing framework
rests with the banking organization’s
board of directors and senior
management. As part of their overall
responsibilities, a banking
organization’s board and senior
management should establish a
comprehensive, integrated and effective
stress testing framework that fits into
the broader risk management of the
banking organization. While the board is
ultimately responsible for ensuring that
the banking organization has an
effective stress testing framework, senior
management generally has
responsibility for implementing that
framework
oard and senior
management should establish a
comprehensive, integrated and effective
stress testing framework that fits into
the broader risk management of the
banking organization. While the board is
ultimately responsible for ensuring that
the banking organization has an
effective stress testing framework, senior
management generally has
responsibility for implementing that
framework. Senior management duties
should include establishing adequate
policies and procedures and ensuring
compliance with those policies and
procedures, assigning competent staff,
overseeing stress test development and
implementation, evaluating stress test
results, reviewing any findings related
to the functioning of stress test
processes, and taking prompt remedial
action where necessary. Senior
management, directly and through
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00131
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
35084
Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Notices
9 For validation of models and other quantitative
tools used for stress testing, see OCC Bulletin 2011–
12 ‘‘Supervisory Guidance on Model Risk
Management’’, or SR letter 11–7, ‘‘Guidance on
Model Risk Management.’’
relevant committees, also should be
responsible for regularly reporting to the
board on stress testing developments
and results from individual and
collective stress tests as well as on
compliance with stress testing policy.
Board members should actively evaluate
and discuss these reports, ensuring that
the stress testing framework is in line
with the banking organization’s risk
appetite, overall strategy and business
plans, and directing changes where
appropriate.
A banking organization should have
written policies, approved and annually
reviewed by the board, that direct and
govern the implementation of the stress
testing framework in a comprehensive
manner
ese reports, ensuring that
the stress testing framework is in line
with the banking organization’s risk
appetite, overall strategy and business
plans, and directing changes where
appropriate.
A banking organization should have
written policies, approved and annually
reviewed by the board, that direct and
govern the implementation of the stress
testing framework in a comprehensive
manner. Policies, along with procedures
to implement them, should:
• Describe the overall purpose of
stress testing activities;
• Articulate consistent and
sufficiently rigorous stress testing
practices across the entire banking
organization;
• Indicate stress testing roles and
responsibilities, including controls over
external resources used for any part of
stress testing (such as vendors and data
providers);
• Describe the frequency and priority
with which stress testing activities
should be conducted;
• Indicate how stress test results are
used and by whom;
• Be reviewed and updated as
necessary to ensure that stress testing
practices remain appropriate and keep
up to date with changes in market
conditions, banking organization
products and strategies, banking
organization exposures and activities,
the banking organization’s established
risk appetite, and industry stress testing
practices.
A stress testing framework should
incorporate validation or other type of
independent review to ensure the
integrity of stress testing processes and
results, consistent with existing
supervisory expectations.9 If a banking
organization engages a third party
vendor to support some or all of its
stress testing activities, there should be
appropriate controls in place to ensure
that those externally-developed systems
and processes are sound, applied
correctly, and appropriate for the
banking organization’s risks, activities,
and exposures
sults, consistent with existing
supervisory expectations.9 If a banking
organization engages a third party
vendor to support some or all of its
stress testing activities, there should be
appropriate controls in place to ensure
that those externally-developed systems
and processes are sound, applied
correctly, and appropriate for the
banking organization’s risks, activities,
and exposures. Additionally, senior
management should be mindful of any
potential inconsistencies,
contradictions, or gaps among its stress
tests and assess what actions should be
taken as a result. Internal audit should
also play a role focused on ensuring the
ongoing performance, integrity, and
reliability of the stress testing
framework. A banking organization
should ensure that its stress tests are
documented appropriately, including a
description of the types of stress tests
and methodologies used, key
assumptions, results, and suggested
actions. The board and senior
management should review stress
testing activities and results with an
appropriately critical eye and ensure
that there is objective review of all stress
testing processes.
The results of stress testing analyses
should facilitate decision-making by the
board and senior management. Stress
testing results should be used to inform
the board about alignment of the
banking organization’s risk profile with
the board’s chosen risk appetite, as well
as inform operating and strategic
decisions. Stress testing results should
be considered directly by the board and
senior management for decisions
relating to capital and liquidity
adequacy, including capital contingency
plans and contingency funding plans.
The board and senior management
should ensure that the stress testing
framework includes a sufficient range of
stress testing activities applied at the
appropriate levels of the banking
organization (i.e., not just one
enterprise-wide stress test)
senior management for decisions
relating to capital and liquidity
adequacy, including capital contingency
plans and contingency funding plans.
The board and senior management
should ensure that the stress testing
framework includes a sufficient range of
stress testing activities applied at the
appropriate levels of the banking
organization (i.e., not just one
enterprise-wide stress test). Sound
governance also includes using stress
testing to consider the effectiveness of a
banking organization’s risk mitigation
techniques for various risk types over
their respective time horizons, such as
to explore what could occur if expected
mitigation techniques break down
during stressful periods.
VII. Conclusion
A banking organization should use
the principles laid out in this guidance
to develop, implement, and maintain an
effective stress testing framework. Such
a framework should be adequately
tailored to the banking organization’s
size, complexity, risks, exposures, and
activities. A key purpose of stress
testing is to explore various types of
possible outcomes, including rare and
extreme events and circumstances,
assess their impact on the banking
organization, and then evaluate the
boundaries up to which the banking
organization plans to be able to
withstand such outcomes.
While stress testing can provide
valuable information regarding potential
future outcomes, similar to any other
risk management tool it has limitations
and cannot provide absolute certainty
regarding the implications of assumed
events and impacts. Furthermore,
management should ensure that stress
testing activities are not constrained to
reflect past experiences, but instead
consider a broad range of possibilities
ovide
valuable information regarding potential
future outcomes, similar to any other
risk management tool it has limitations
and cannot provide absolute certainty
regarding the implications of assumed
events and impacts. Furthermore,
management should ensure that stress
testing activities are not constrained to
reflect past experiences, but instead
consider a broad range of possibilities.
No single stress test can accurately
estimate the impact of all stressful
events and circumstances; therefore, a
banking organization should understand
and account for stress testing limitations
and uncertainties, and use stress tests in
combination with other risk
management tools to make informed
risk management and business
decisions.
This concludes the text of the
proposed guidance.
Dated: June 2, 2011.
John Walsh,
Acting Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, June 8, 2011.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 7th of June
2011.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2011–14777 Filed 6–14–11; 8:45 am]
BILLING CODE 4810–33–P; 6210–01–P
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
Mutual to Stock Conversion
Application
AGENCY: Office of Thrift Supervision
(OTS), Treasury.
ACTION: Notice and request for comment.
SUMMARY: The proposed information
collection request (ICR) described below
has been submitted to the Office of
Management and Budget (OMB) for
review and approval, as required by the
Paperwork Reduction Act of 1995, 44
U.S.C. 3507. OTS is soliciting public
comments on the proposal.
DATES: Submit written comments on or
before July 15, 2011. A copy of this ICR,
with applicable supporting
documentation, can be obtained from
RegInfo.gov at http://www.reginfo.gov/
public/do/PRAMain
d to the Office of
Management and Budget (OMB) for
review and approval, as required by the
Paperwork Reduction Act of 1995, 44
U.S.C. 3507. OTS is soliciting public
comments on the proposal.
DATES: Submit written comments on or
before July 15, 2011. A copy of this ICR,
with applicable supporting
documentation, can be obtained from
RegInfo.gov at http://www.reginfo.gov/
public/do/PRAMain.
ADDRESSES: Send comments, referring to
the collection by title of the proposal or
by OMB approval number, to OMB and
OTS at these addresses: Office of
Information and Regulatory Affairs,
Attention: Desk Officer for OTS, U.S.
Office of Management and Budget, 725
17th Street, NW., Room 10235,
VerDate Mar<15>2010
16:42 Jun 14, 2011
Jkt 223001
PO 00000
Frm 00132
Fmt 4703
Sfmt 4703
E:\FR\FM\15JNN1.SGM
15JNN1
jlentini on DSK4TPTVN1PROD with NOTICES
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.