Proposed Interagency Guidance on Company-Run Stress Tests

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may be done without risk of harm to the

animals or to the public?

• Should exhibitors and dealers be

required to keep additional records

(beyond those already required)

regarding big cats, bears, and nonhuman

primates? If so, what kinds of

information should be required to be

kept?

• Should exhibitors and dealers be

required to identify big cats, bears, and

nonhuman primates by means of tattoos,

microchips, retinal scans, or the like?

We encourage the submission of

scientific data, studies, or research to

support your comments and position,

including scientific data or research that

supports any industry or professional

standards that pertain to the humane

treatment of big cats, bears, and

nonhuman primates. We also invite data

on the costs and benefits associated

with any recommendations. We will

consider all comments and

recommendations we receive.

Authority: 7 U.S.C. 2131–2159; 7 CFR

2.22, 2.80, and 371.7.

Done in Washington, DC, this 31st day of

July 2013.

Kevin Shea,

Administrator, Animal and Plant Health

Inspection Service.

[FR Doc. 2013–18874 Filed 8–2–13; 8:45 am]

BILLING CODE 3410–34–P

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 46

[Docket No. OCC–2013–0013]

FEDERAL RESERVE SYSTEM

12 CFR Part 252

[Docket No. OP–1461]

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 325

Proposed Supervisory Guidance on

Implementing Dodd-Frank Act

Company-Run Stress Tests for

Banking Organizations With Total

Consolidated Assets of More Than $10

Billion But Less Than $50 Billion

AGENCIES: Board of Governors of the

Federal Reserve System (‘‘Board’’ or

‘‘Federal Reserve’’); Federal Deposit

Insurance Corporation (‘‘FDIC’’); Office

of the Comptroller of the Currency,

Treasury (‘‘OCC’’).

ACTION: Proposed supervisory guidance

-Frank Act

Company-Run Stress Tests for

Banking Organizations With Total

Consolidated Assets of More Than $10

Billion But Less Than $50 Billion

AGENCIES: Board of Governors of the

Federal Reserve System (‘‘Board’’ or

‘‘Federal Reserve’’); Federal Deposit

Insurance Corporation (‘‘FDIC’’); Office

of the Comptroller of the Currency,

Treasury (‘‘OCC’’).

ACTION: Proposed supervisory guidance.

SUMMARY: The Board, FDIC and OCC,

(collectively, the ‘‘agencies’’) are issuing

this guidance, which outlines high-level

principles for implementation of section

165(i)(2) of the Dodd-Frank Act Wall

Street Reform and Consumer Protection

Act (‘‘DFA’’) stress tests, applicable to

all bank and savings-and-loan holding

companies, national banks, state-

member banks, state non-member banks,

Federal savings associations, and state

chartered savings associations with

more than $10 billion but less than $50

billion in total consolidated assets

(collectively, the ‘‘$10–50 billion

companies’’). The guidance discusses

supervisory expectations for DFA stress

test practices and offers additional

details about methodologies that should

be employed by these companies. It also

underscores the importance of stress

testing as an ongoing risk management

practice that supports a company’s

forward-looking assessment of its risks

and better equips the company to

address a range of macroeconomic and

financial outcomes.

DATES: Comments on this joint proposed

guidance are due to the OCC and FDIC

on September 25th, 2013 and to the

Federal Reserve on September 30th,

2013.

ADDRESSES:

OCC: Because paper mail in the

Washington, DC area and at the OCC is

subject to delay, commenters are

encouraged to submit comments by

email, if possible

he company to

address a range of macroeconomic and

financial outcomes.

DATES: Comments on this joint proposed

guidance are due to the OCC and FDIC

on September 25th, 2013 and to the

Federal Reserve on September 30th,

2013.

ADDRESSES:

OCC: Because paper mail in the

Washington, DC area and at the OCC is

subject to delay, commenters are

encouraged to submit comments by

email, if possible. Please use the title

‘‘Proposed Supervisory Guidance on

Implementing Dodd-Frank Act

Company-Run Stress Tests for Banking

Organizations with Total Consolidated

Assets of more than $10 Billion but less

than $50 Billion’’ to facilitate the

organization and distribution of the

comments. You may submit comments

by any of the following methods:

• Email:

regs.comments@occ.treas.gov.

• Mail: Legislative and Regulatory

Activities Division, Office of the

Comptroller of the Currency, 400 7th

Street SW., Suite 3E–218, Mail Stop

9W–11, Washington, DC 20219.

• Hand Delivery/Courier: 400 7th

Street SW., Suite 3E–218, Mail Stop

9W–11, Washington, DC 20219.

• Fax: (571) 465–4326.

Instructions: You must include

‘‘OCC’’ as the agency name and ‘‘Docket

ID OCC–2013–0013’’ 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

information, email 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, 400 7th Street

SW., Washington, DC

osure. 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, 400 7th 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) 649–6700. 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: You may submit comments,

identified by Docket No. OP–1461,

‘‘Proposed Supervisory Guidance on

Implementing Dodd-Frank Act

Company-Run Stress Tests for Banking

Organizations with Total Consolidated

Assets of more than $10 Billion but less

than $50 Billion,’’ 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.

• Email:

regs.comments@federalreserve.gov.

Include the docket number in the

subject line of the message.

• Fax: (202) 452–3819 or (202) 452–

3102.

• Mail: Address to Robert deV.

Frierson, Secretary, Board of Governors

of the Federal Reserve System, 20th

Street and Constitution Avenue NW.,

Washington, DC 20551.

All public comments will be made

available on the Board’s Web site at

http://www.federalreserve.gov/

generalinfo/foia/ProposedRegs.cfm as

submitted, unless modified for technical

reasons

: (202) 452–3819 or (202) 452–

3102.

• Mail: Address to Robert deV.

Frierson, Secretary, Board of Governors

of the Federal Reserve System, 20th

Street and Constitution Avenue NW.,

Washington, DC 20551.

All public comments will be made

available on the Board’s Web site at

http://www.federalreserve.gov/

generalinfo/foia/ProposedRegs.cfm as

submitted, unless modified for technical

reasons. Accordingly, comments will

not be edited to remove any identifying

or contact information. Public

comments may also be viewed

electronically or in paper in Room MP–

500 of the Board’s Martin Building (20th

and C Streets NW., Washington, DC

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1 For the OCC, the term ‘‘company’’ is used in this

guidance to refer to national banks and Federal

savings associations that qualify as ‘‘covered

institutions’’ under the OCC Annual Stress Test

Rule. 12 CFR 46.2. For the Board, the term

‘‘company’’ is used in this guidance to refer to state

member banks, bank holding companies, and

savings and loan holding companies. 12 CFR

252.153. For the FDIC, the term ‘‘company’’ is used

in this guidance to refer to insured state

nonmember banks and insured state savings

associations that qualify as a ‘‘covered bank’’ under

the FDIC Annual Stress Test Rule. 12 CFR 325.202.

2 See 77 FR 61238 (October 9, 2012) (OCC final

rule), 77 FR 62378 (October 12, 2012) (Board final

rule), and 77 FR 62417 (October 15, 2012) (FDIC

final rule).

3 In particular, companies should conduct tests in

accordance with 77 FR 29458, ‘‘Supervisory

Guidance on Stress Testing for Banking

Organizations With More Than $10 Billion in Total

Consolidated Assets,’’ (May 17, 2012)

FR 325.202.

2 See 77 FR 61238 (October 9, 2012) (OCC final

rule), 77 FR 62378 (October 12, 2012) (Board final

rule), and 77 FR 62417 (October 15, 2012) (FDIC

final rule).

3 In particular, companies should conduct tests in

accordance with 77 FR 29458, ‘‘Supervisory

Guidance on Stress Testing for Banking

Organizations With More Than $10 Billion in Total

Consolidated Assets,’’ (May 17, 2012).

4 To the extent that the guidance conflicts with

the requirements imposed with respect to any

future statutory or regulatory stress test, companies

must comply with the requirements set forth in the

relevant statute or regulation.

5 For Federal Reserve-regulated companies the

relevant reporting form is the FR Y–16, for OCC-

regulated companies the relevant form is the OCC

DFAST 10–50, and for FDIC-regulated companies

the relevant form is the FDIC DFAST 10–50.

6 12 CFR 252.155(a)(1).

20551) between 9:00 a.m. and 5:00 p.m.

on weekdays.

FDIC: You may submit comments,

identified as ‘‘Stress Test Guidance’’, by

any of the following methods:

Agency Web site: http://

www.fdic.gov/regulations/laws/federal/

propose.html. Follow instructions for

submitting comments on the Agency

Web site.

• Email: Comments@fdic.gov. Include

‘‘Stress Test Guidance’’ on the subject

line of the message.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments, Federal

Deposit Insurance Corporation, 550 17th

Street NW., Washington, DC 20429.

• Hand Delivery: Comments may be

hand delivered to the guard station at

the rear of the 550 17th Street Building

(located on F Street) on business days

between 7:00 a.m. and 5:00 p.m.

Public Inspection: All comments

received must include the agency name

and ‘‘Stress Test Guidance’’. All

comments received will be posted

without change to http://www.fdic.gov/

regulations/laws/federal/propose.html,

including any personal information

provided

e guard station at

the rear of the 550 17th Street Building

(located on F Street) on business days

between 7:00 a.m. and 5:00 p.m.

Public Inspection: All comments

received must include the agency name

and ‘‘Stress Test Guidance’’. All

comments received will be posted

without change to http://www.fdic.gov/

regulations/laws/federal/propose.html,

including any personal information

provided. Paper copies of public

comments may be ordered from the

FDIC Public Information Center, 3501

North Fairfax Drive, Room E–1002,

Arlington, VA 22226 by telephone at

(877) 275–3342 or (703) 562–2200.

FOR FURTHER INFORMATION CONTACT:

Board: David Palmer, Senior

Financial Analyst, (202) 452–2904;

Joseph Cox, Financial Analyst, (202)

452–3216; Keith Coughlin, Manager,

(202) 452–2056; Benjamin McDonough,

Senior Counsel, (202) 452–2036; or

Christine Graham, Senior Attorney,

(202) 452–3005, Board of Governors of

the Federal Reserve System, 20th and C

Streets NW., Washington, DC 20551.

FDIC: Ryan Sheller, Senior Financial

Analyst, (202) 412–4861; Mark Flanigan,

Counsel, (202) 898–7427; or Jason

Fincke, Senior Attorney, (202) 898–

3659, Federal Deposit Insurance

Corporation, 550 17th Street NW.,

Washington, DC 20429.

OCC: Harry Glenos, Senior Financial

Advisor, (202) 649–6409; Kari

Falkenborg, Financial Analyst, (202)

649–6831; Ron Shimabukuro, Senior

Counsel, or Henry Barkhausen,

Attorney, Legislative and Regulatory

Affairs Division, (202) 649–5490, Office

of the Comptroller of the Currency, 400

7th Street SW., Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

I

th Street NW.,

Washington, DC 20429.

OCC: Harry Glenos, Senior Financial

Advisor, (202) 649–6409; Kari

Falkenborg, Financial Analyst, (202)

649–6831; Ron Shimabukuro, Senior

Counsel, or Henry Barkhausen,

Attorney, Legislative and Regulatory

Affairs Division, (202) 649–5490, Office

of the Comptroller of the Currency, 400

7th Street SW., Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

I. Background

In October 2012, the agencies issued

final rules implementing stress testing

requirements for companies 1 with over

$10 billion in total assets pursuant to

section 165(i)(2) of the Dodd-Frank Wall

Street Reform and Consumer Protection

Act (‘‘DFA stress test rules’’).2 At that

time, the agencies also indicated that

they intended to publish supervisory

guidance to accompany the final rules

and assist companies in meeting rule

requirements, including separate

guidance for companies between $10

billion and $50 billion in total assets.

Accordingly, the agencies are issuing

this proposed guidance, which would

apply to all companies with total

consolidated assets of more than $10

billion but less than $50 billion ($10–50

billion companies). The agencies invite

public comment on this proposed

guidance. The agencies expect $10–50

billion companies to follow the DFA

stress rule requirements, other relevant

supervisory guidance,3 and if adopted,

the expectations set forth in this

document, when conducting DFA stress

tests.4

The proposed guidance addresses the

following key areas:

• Supervisory scenarios. Under the

DFA stress test rules, $10–50 billion

companies must assess the potential

impact of a minimum of three

macroeconomic scenarios—baseline,

adverse, and severely adverse—on their

consolidated losses, revenues, balance

sheet (including risk-weighted assets),

and capital

conducting DFA stress

tests.4

The proposed guidance addresses the

following key areas:

• Supervisory scenarios. Under the

DFA stress test rules, $10–50 billion

companies must assess the potential

impact of a minimum of three

macroeconomic scenarios—baseline,

adverse, and severely adverse—on their

consolidated losses, revenues, balance

sheet (including risk-weighted assets),

and capital. The proposed guidance

indicates that $10–50 billion companies

should apply each scenario across all

business lines and risk areas so that they

can assess the effect of a common

scenario on the entire enterprise, though

the effect of the given scenario on

different business lines and risk areas

may vary. These companies may use all

or, as appropriate, a subset of the

variables from the supervisory scenarios

to conduct a stress test, depending on

whether the variables are relevant or

appropriate to the company’s line of

business. The companies may, but are

not required to, include additional

variables or additional quarters to

improve their company-run stress tests.

For example, the proposed guidance

includes a set of questions on

translating supervisory scenarios to

regional variables and minimum

expectations for loss estimation.

However, the paths of any additional

regional or local variables that a

company uses would be expected to be

consistent with the path of the national

variables in the supervisory scenarios.

• Data sources and segmentation. In

conducting a stress test, a company

should segment its portfolios and

business activities into categories based

on common or related risk

characteristics. The company should

select the appropriate level of

segmentation based on the size,

materiality, and riskiness of a given

portfolio, provided there are sufficiently

granular historical data available to

allow for the desired segmentation

onducting a stress test, a company

should segment its portfolios and

business activities into categories based

on common or related risk

characteristics. The company should

select the appropriate level of

segmentation based on the size,

materiality, and riskiness of a given

portfolio, provided there are sufficiently

granular historical data available to

allow for the desired segmentation. A

company would be expected to be able

to segment its data at a level at least as

granular as the reporting form it uses to

report the results to its primary

regulator and the Board (‘‘$10–50 billion

reporting form’’), but may use a more

granular segmentation, particularly for

more material or riskier portfolios.5 If a

company does not currently have

sufficient internal data to conduct a

stress test, it may use an alternative data

source as a proxy for its own risk profile

and exposures. However, companies

with limited data would be expected to

construct strategies to develop sufficient

data to improve their stress test

estimation processes over time.

• Loss estimation. In conducting a

stress test, for each quarter of the

planning horizon, a company must

estimate the following for each required

scenario: losses, pre-provision net

revenue (PPNR), provision for loan and

lease losses, and net income.6 Credit

losses associated with loan portfolios

and securities holdings should be

estimated directly and separately,

whereas other types of losses should be

incorporated into estimated pre-

provision net revenue. Larger or more

sophisticated companies should

consider more advanced loss estimation

practices that identify the key drivers of

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eparately,

whereas other types of losses should be

incorporated into estimated pre-

provision net revenue. Larger or more

sophisticated companies should

consider more advanced loss estimation

practices that identify the key drivers of

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7 See OMB Control Nos. 1557–0311 and 1557–

0312 (OCC); 3064–0186 and 3064–0187 (FDIC); and

7100–0348 and 7100–0350 (Board).

8 Effective July 22, 2013, the Small Business

Administration revised the size standards for small

banking organizations to $500 million in assets

from $175 million in assets. 78 FR 37409 (June 20,

2013).

losses for a given portfolio, segment, or

loan; determine how those drivers

would be affected in supervisory

scenarios; and estimate resulting losses.

Loss estimation practices should be

commensurate with the materiality of

the risks measured and well supported

by sound, empirical analysis.

Companies may use different processes

for the baseline scenario, including their

budgeting process if it is conditioned on

the supervisory scenario, than for the

adverse and severely adverse scenarios

in order to better capture the loss

potential under stressful conditions.

• Pre-provision net revenue. The

proposed guidance indicates that

companies that are less complex or less

sophisticated could estimate projected

PPNR based on the three main

components of PPNR (net interest

income, non-interest income, non-

interest expense) at an aggregate,

company-wide level based on industry

experience

to better capture the loss

potential under stressful conditions.

• Pre-provision net revenue. The

proposed guidance indicates that

companies that are less complex or less

sophisticated could estimate projected

PPNR based on the three main

components of PPNR (net interest

income, non-interest income, non-

interest expense) at an aggregate,

company-wide level based on industry

experience. Companies that are more

complex or more sophisticated should

consider methods that more fully

capture potential risks to their business

and strategy by collecting internal

revenue data, estimating revenues

within specific business lines, exploring

more advanced techniques that identify

the specific drivers of revenue, and

analyzing how the supervisory scenarios

affect those revenue drivers. In addition

to credit losses, companies may

determine that other types of losses

could arise under the supervisory

scenarios. These other types of losses

should be included in projections of

PPNR to the extent they would arise

under the specified scenario conditions.

For example, companies should include

in their PPNR projections any trading

losses, any losses related to mortgage

repurchase agreements, mortgage

servicing rights, or losses related to

operational risk arising in the scenarios.

• Balance sheet and risk-weighted

assets projections. Under the proposed

guidance, a company would be expected

to ensure that projected balance sheet

and risk-weighted assets remain

consistent with regulatory and

accounting changes, are applied

consistently across the company, and

are consistent with the scenario and the

company’s past history of managing

through different business

environments

e sheet and risk-weighted

assets projections. Under the proposed

guidance, a company would be expected

to ensure that projected balance sheet

and risk-weighted assets remain

consistent with regulatory and

accounting changes, are applied

consistently across the company, and

are consistent with the scenario and the

company’s past history of managing

through different business

environments. Companies should

document and explain key underlying

assumptions about changes in balances

or risk-weighted assets under stressful

conditions, including justifying major

changes, justifying any assumptions

about strategies that may mitigate losses

under the stressful conditions, and

ensuring that the assumptions do not

substantially alter the company’s core

businesses and earnings capacity.

• Governance and controls. Under the

DFA stress test rules, a $10–50 billion

company is required to establish and

maintain a system of controls, oversight,

and documentation, including policies

and procedures, that are designed to

ensure that its stress testing processes

are effective in meeting the

requirements of the DFA stress test rule.

The proposed guidance describes

supervisory expectations and sound

practices regarding the controls,

oversight, and documentation required

by the rule. All $10–50 billion

companies must consider the role of

stress testing results in normal business

including in the capital planning,

assessment of capital adequacy, and risk

management practices of the company.

For instance, a $10–50 billion company

would be expected to ensure that its

post-stress capital results are aligned

with its internal capital goals and risk

appetite. For cases in which post-stress

capital results are not aligned with a

company’s internal capital goals, senior

management should provide options it

and the board would consider to bring

them into alignment.

II. Request for Comments

The agencies invite comment on all

aspects of the proposed guidance

post-stress capital results are aligned

with its internal capital goals and risk

appetite. For cases in which post-stress

capital results are not aligned with a

company’s internal capital goals, senior

management should provide options it

and the board would consider to bring

them into alignment.

II. Request for Comments

The agencies invite comment on all

aspects of the proposed guidance.

Specifically, the agencies seek comment

on the following questions.

Question 1: What challenges do

companies expect in relating the

national variables in the scenarios to

regional and local market footprints?

Question 2: What additional clarity

might be needed regarding the

appropriate use of historical experience

in the loss, revenue, balance sheet, and

risk-weighted asset estimation process?

Question 3: What additional clarity

should the guidance provide about the

use of vendor or other third-party

products and services that companies

might choose to employ for DFA stress

tests?

Question 4: How could the proposed

guidance be clearer about the manner in

which the required capital action

assumptions between holding

companies and banks differ, and how

those different assumptions should be

reconciled within a consolidated

organization?

Question 5: What additional

clarification would be helpful to

companies about the responsibilities of

their boards and senior management

with regard to DFA stress tests?

The agencies request that commenters

reference the question numbers above

when providing answers to those

questions.

III. Administrative Law Matters

A. Paperwork Reduction Act Analysis

This guidance references currently

approved collections of information

under the Paperwork Reduction Act (44

U.S.C. 3501–3520) provided for in the

DFA stress test rules.7 This guidance

does not introduce any new collections

of information nor does it substantively

modify the collections of information

that Office of Management and Budget

(OMB) has approved

aperwork Reduction Act Analysis

This guidance references currently

approved collections of information

under the Paperwork Reduction Act (44

U.S.C. 3501–3520) provided for in the

DFA stress test rules.7 This guidance

does not introduce any new collections

of information nor does it substantively

modify the collections of information

that Office of Management and Budget

(OMB) has approved. Therefore, no

Paperwork Reduction Act submissions

to OMB are required.

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

guidance on small companies in

accordance with the Regulatory

Flexibility Act (5 U.S.C. 603(b)). 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 a

regulatory flexibility analysis.

For the reason discussed in the

Supplementary Information above, the

agencies are issuing this guidance to

provide additional details regarding the

supervisory expectations for the DFA

stress tests conducted by $10–50 billion

companies. Under regulations issued by

the Small Business Administration

(‘‘SBA’’), a small entity includes a

depository institution, bank holding

company, or savings and loan holding

company with total assets of $500

million or less (a small banking

organization).8 The proposed guidance

would apply to companies supervised

by the agencies with more than $10

billion but less than $50 billion in total

consolidated assets, including state

member banks, bank holding

companies, and savings and loan

holding companies. Companies that

would be subject to the proposed

guidance therefore substantially exceed

the $500 million total asset threshold at

which a company is considered a small

company under SBA regulations

by the agencies with more than $10

billion but less than $50 billion in total

consolidated assets, including state

member banks, bank holding

companies, and savings and loan

holding companies. Companies that

would be subject to the proposed

guidance therefore substantially exceed

the $500 million total asset threshold at

which a company is considered a small

company under SBA regulations. In

light of the foregoing, the Board does

not believe that the guidance would

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9 See 77 FR 61238 (October 9, 2012) (OCC), 77 FR

62396 (October 12, 2012) (Board: Annual Company-

Run Stress Test Requirements for Banking

Organizations with Total Consolidated Assets over

$10 Billion Other than Covered Companies), and 77

FR 62417 (October 15, 2012) (FDIC).

10 Public Law 111–203, 124 Stat. 1376 (2010).

Each entity that meets the applicability criteria

must conduct a separate stress test and provide a

separate submission. For example, both a bank

holding company between $10–50 billion in assets

and its subsidiary bank with between $10–50

billion in assets must conduct a separate stress test;

however, if a subsidiary bank of a $10–50 billion

bank holding company has $10 billion or less in

assets then it does not need to conduct a DFA stress

test.

11 For the OCC, the term ‘‘company’’ is used in

this guidance to refer to a banking organization that

qualifies as a ‘‘covered institution’’ under the OCC

Annual Stress Test Rule. 12 CFR 46.2. For the

Board, the term ‘‘company’’ is used in this guidance

to refer to state member banks, bank holding

companies, and savings and loan holding

companies. 12 CFR 252.153

conduct a DFA stress

test.

11 For the OCC, the term ‘‘company’’ is used in

this guidance to refer to a banking organization that

qualifies as a ‘‘covered institution’’ under the OCC

Annual Stress Test Rule. 12 CFR 46.2. For the

Board, the term ‘‘company’’ is used in this guidance

to refer to state member banks, bank holding

companies, and savings and loan holding

companies. 12 CFR 252.153. For the FDIC, the term

‘‘company’’ is used in this guidance to refer to

insured state nonmember banks and insured state

savings associations that qualifies as a ‘‘covered

bank’’ under the FDIC Annual Stress Test Rule. 12

CFR 325.202.

12 77 FR 29458, ‘‘Supervisory Guidance on Stress

Testing for Banking Organizations With More Than

$10 Billion in Total Consolidated Assets,’’ (May 17,

2012).

13 As indicated in the DFA stress test final rules,

the agencies also plan to issue supervisory guidance

for companies with at least $50 billion in total

assets. Consistent with the approach taken in the

DFA stress test final rules, the agencies expect the

guidance for companies with at least $50 billion to

contain standards that are comparable or elevated

in all areas.

14 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.

have a significant economic impact on

a substantial number of small entities.

IV. Proposed Supervisory Guidance

The text of the proposed supervisory

guidance is as follows:

Office of the Comptroller of the

Currency

Federal Reserve System

Federal Deposit Insurance Corporation

Proposed Supervisory Guidance on

Implementing Dodd-Frank Act

Company-Run Stress Tests for Banking

Organizations With Total Consolidated

Assets of More Than $10 Billion but

Less Than $50 Billion

I. Introduction

In October 2012, the U.S

the proposed supervisory

guidance is as follows:

Office of the Comptroller of the

Currency

Federal Reserve System

Federal Deposit Insurance Corporation

Proposed Supervisory Guidance on

Implementing Dodd-Frank Act

Company-Run Stress Tests for Banking

Organizations With Total Consolidated

Assets of More Than $10 Billion but

Less Than $50 Billion

I. Introduction

In October 2012, the U.S. Federal

banking agencies issued the Dodd-Frank

Act stress test rules 9 requiring

companies with total consolidated

assets of more than $10 billion to

conduct annual company-run stress

tests pursuant to section 165(i)(2) of the

Dodd-Frank Wall Street Reform and

Consumer Protection Act (DFA).10 This

guidance outlines key expectations for

companies with total consolidated

assets of more than $10 billion but less

than $50 billion that are required to

conduct DFA stress tests (collectively

‘‘companies’’ or ‘‘$10–50 billion

companies’’).11 It builds upon the

interagency stress testing guidance

issued in May 2012 for companies with

more than $10 billion in total

consolidated assets (‘‘May 2012 stress

testing guidance’’).12

The expectations described in this

guidance are tailored to the $10–50

billion companies, similar to the

manner in which the requirements in

the DFA stress test rules were tailored

for this set of companies.13 The

additional information provided in this

guidance should assist companies in

complying with the DFA stress test rules

and conducting DFA stress tests that are

appropriate for their risk profile, size,

complexity, business mix, and market

footprint. The DFA stress test rules

allow flexibility to accommodate

different practices across organizations,

for example by not specifying specific

methodological practices. Consistent

with this approach, this guidance sets

general supervisory expectations for

stress tests, and provides, where

appropriate, some examples of possible

practices that would be consistent with

those expectations

rint. The DFA stress test rules

allow flexibility to accommodate

different practices across organizations,

for example by not specifying specific

methodological practices. Consistent

with this approach, this guidance sets

general supervisory expectations for

stress tests, and provides, where

appropriate, some examples of possible

practices that would be consistent with

those expectations.

This guidance does not represent a

comprehensive list of potential

practices, and companies are not

required to use any specific

methodological practices for their stress

tests. Companies may use various

practices to project their losses,

revenues, and capital that are

appropriate for their risk profile, size,

complexity, business mix, market

footprint and the materiality of a given

portfolio.

II. Background

Stress tests are an important part of a

company’s risk management practices,

supporting a company’s forward-looking

assessment of its risks and helping to

ensure that the company has sufficient

capital to support its operations through

periods of stress. The agencies have

previously highlighted the importance

of stress testing as a means for

companies to better understand the

range of potential risks. Specifically, the

May 2012 stress testing guidance sets

forth the following five principles for an

effective stress testing regime:

1. A company’s stress testing

framework should include activities and

exercises that are tailored to and

sufficiently capture the company’s

exposures, activities, and risks;

2. An effective stress testing

framework should employ multiple

conceptually sound stress testing

activities and approaches;

3. An effective stress testing

framework should be forward-looking

and flexible;

4. Stress test results should be clear,

actionable, well supported, and inform

decision-making; and

5. A company’s stress testing

framework should include strong

governance and effective internal

controls

testing

framework should employ multiple

conceptually sound stress testing

activities and approaches;

3. An effective stress testing

framework should be forward-looking

and flexible;

4. Stress test results should be clear,

actionable, well supported, and inform

decision-making; and

5. A company’s stress testing

framework should include strong

governance and effective internal

controls.

The agencies expect that companies

will follow the principles and

expectations in the May 2012 stress

testing guidance when conducting their

DFA stress tests. This DFA stress test

guidance builds upon the May 2012

stress testing guidance, sets forth the

supervisory expectations regarding each

requirement of the DFA stress test rules,

and provides illustrative examples of

satisfactory practices. The guidance

indicates where different requirements

apply to banks, thrifts, and holding

companies. The guidance is structured

as follows:

A. DFA Stress Test Timelines

B. Scenarios for DFA Stress Tests

C. DFA Stress Test Methodologies and

Practices

D. Estimating the Potential Impact on

Regulatory Capital Levels and Capital

Ratios

E. Controls, Oversight, and

Documentation

F. Report to Supervisors

G. Public Disclosure of DFA Stress Tests

The agencies expect that the annual

company-run stress tests required under

the DFA stress test rules will be one

component of the broader stress-testing

activities conducted by $10–$50 billion

companies. The DFA stress tests may

not necessarily capture a company’s full

range of risks, exposures, activities, and

vulnerabilities that have a potential

effect on capital adequacy

tress Tests

The agencies expect that the annual

company-run stress tests required under

the DFA stress test rules will be one

component of the broader stress-testing

activities conducted by $10–$50 billion

companies. The DFA stress tests may

not necessarily capture a company’s full

range of risks, exposures, activities, and

vulnerabilities that have a potential

effect on capital adequacy. For example,

DFA stress tests may not account for

regional concentrations and unique

business models, or they may not fully

cover the potential capital effects of

interest rate risk or an operational risk

event such as a regional natural

disaster.14 Consistent with the May 2012

stress testing guidance, a company is

expected to consider the results of DFA

stress testing together with other capital

assessment activities to ensure that the

company’s material risks and

vulnerabilities are appropriately

considered in its overall assessment of

capital adequacy. Finally, the DFA

stress tests assess the impact of stressful

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15 12 CFR 46.5 (OCC); 12 CFR 252.154 (Board); 12

CFR 325.204 (FDIC).

16 Planning horizon means the period of at least

nine quarters, beginning with the quarter ending

December 31, over which the relevant stress test

projections extend.

17 12 CFR 46.6 (OCC); 12 CFR 252.154 (Board); 12

CFR 325.204 (FDIC).

18 ‘‘Supervisory Guidance on Model Risk

Management,’’ OCC 2011–12, or ‘‘Guidance on

Model Risk Management,’’ Federal Reserve SR 11–

7, April 4, 2011.

19 12 CFR 46.6 (OCC); 12 CFR 252.155(a)(1)

(Board); 12 CFR 325.205(a)(1) (FDIC).

outcomes on capital adequacy, and are

not intended to measure the adequacy of

a company’s liquidity in the stress

scenarios.

III. Annual Tests Conducted by

Companies

A

visory Guidance on Model Risk

Management,’’ OCC 2011–12, or ‘‘Guidance on

Model Risk Management,’’ Federal Reserve SR 11–

7, April 4, 2011.

19 12 CFR 46.6 (OCC); 12 CFR 252.155(a)(1)

(Board); 12 CFR 325.205(a)(1) (FDIC).

outcomes on capital adequacy, and are

not intended to measure the adequacy of

a company’s liquidity in the stress

scenarios.

III. Annual Tests Conducted by

Companies

A. DFA Stress Test Timelines

Rule Requirement: A company must

conduct a stress test over a nine-quarter

planning horizon based on data as of

September 30 of the preceding calendar

year.15

Stress test projections are based on

exposures with the as-of date of

September 30 and extend over a nine-

quarter planning horizon that begins in

the quarter ending December 31 of the

same year and ends with the quarter

ending December 31 two years later.16

For example, a stress test beginning in

the fall of 2013 would use an as-of date

of September 30, 2013, and involve

quarterly projections of losses, PPNR,

balance sheet, risk-weighted assets, and

capital beginning on December 31, 2013

of that year and ending on December 31,

2015. In order to project quarterly

provisions, a company would need to

estimate the adequate level of the

allowance for loan and lease losses

(‘‘ALLL’’) to support remaining credit

risk at the end of each quarter—

including the final quarter—which may

require additional projections of credit

losses beyond 2015 to ensure the ALLL

is consistent with Generally Accepted

Accounting Principles (GAAP).

B

er to project quarterly

provisions, a company would need to

estimate the adequate level of the

allowance for loan and lease losses

(‘‘ALLL’’) to support remaining credit

risk at the end of each quarter—

including the final quarter—which may

require additional projections of credit

losses beyond 2015 to ensure the ALLL

is consistent with Generally Accepted

Accounting Principles (GAAP).

B. Scenarios for DFA Stress Tests

Rule Requirement: A company must

use the scenarios provided annually by

its primary Federal financial regulatory

agency to assess the potential impact of

the scenarios on its consolidated

earnings, losses, and capital.17

Under the DFA stress test rules, $10–

50 billion companies must assess the

potential impact of a minimum of three

macroeconomic scenarios—baseline,

adverse, and severely adverse—

provided by their primary supervisor on

their consolidated losses, revenues,

balance sheet (including risk-weighted

assets), and capital. The rule defines the

three scenarios as follows:

• Baseline scenario means a set of

conditions that affect the U.S. economy

or the financial condition of a company

that reflect the consensus views of the

economic and financial outlook.

• Adverse scenario means a set of

conditions that affect the U.S. economy

or the financial condition of a company

that are more adverse than those

associated with the baseline scenario

and may include trading or other

additional components.

• Severely adverse scenario means a

set of conditions that affect the U.S.

economy or the financial condition of a

company that overall are more severe

than those associated with the adverse

scenario and may include trading or

other additional components.

The agencies will provide a

description of the supervisory scenarios

to companies no later than November 15

each calendar year

nents.

• Severely adverse scenario means a

set of conditions that affect the U.S.

economy or the financial condition of a

company that overall are more severe

than those associated with the adverse

scenario and may include trading or

other additional components.

The agencies will provide a

description of the supervisory scenarios

to companies no later than November 15

each calendar year. The scenarios

provided by the agencies are not

forecasts but rather are hypothetical

scenarios that companies will use to

assess their capital strength in baseline

and stressed economic and financial

conditions. Companies should apply

each scenario across all business lines

and risk areas so that they can assess the

effect of a common scenario on the

entire enterprise, though the effect of

the given scenario on different business

lines and risks may vary.

The agencies believe that a uniform

set of supervisory scenarios is necessary

to provide a basis for comparison across

companies. However, a company is not

required to use all of the variables

provided in the scenario, if those

variables are not relevant or appropriate

to the company’s line of business. In

addition, a company may, but is not

required to, use additional variables

beyond those provided by the agencies.

For example, a company may decide to

use a regional unemployment rate to

improve the robustness of its stress test

projections. When using additional

variables, companies should ensure that

the paths of such variables (including

their timing) are consistent with the

general economic environment assumed

in the supervisory scenarios. Any use of

additional variables should be well

supported and documented.

In addition, a company may choose to

project the paths of variables beyond the

timeframe of the supervisory scenarios,

if a longer horizon is necessary for the

company’s stress testing methodology

bles (including

their timing) are consistent with the

general economic environment assumed

in the supervisory scenarios. Any use of

additional variables should be well

supported and documented.

In addition, a company may choose to

project the paths of variables beyond the

timeframe of the supervisory scenarios,

if a longer horizon is necessary for the

company’s stress testing methodology.

For example, a company may project the

unemployment rate for additional

quarters in order to calculate inputs to

its end-of-horizon ALLL or to estimate

the projected value of certain types of

securities under the scenario.

Companies may use third-party

vendors to assist in the development of

additional variables based on the

supervisory stress scenarios. In such

instances, consistent with existing

supervisory expectations,18 companies

should understand the third-party

analysis used to develop additional

variables, including the potential

limitations of such analysis as it relates

to stress tests, and be able to challenge

key assumptions. Companies should

also ensure that vendor-supplied

variables they use are relevant for and

relate to company-specific

characteristics.

C. DFA Stress Test Methodologies and

Practices

Rule Requirement: In conducting a

stress test, for each quarter of the

planning horizon, a company must

estimate the following for each required

scenario: losses, pre-provision net

revenue, provision for loan and lease

losses, and net income.19

As noted above, companies must

identify and determine the impact on

capital from the supervisory scenarios,

as represented through the supervisory

scenario variables and any additional

variables chosen by the company. A

company’s estimation processes should

reasonably capture the relationship

between the assumed scenario

conditions and the projected impacts

and outcomes to the company. The

agencies expect that the specific

methodological practices used by

companies to produce the estimates may

vary across organizations

supervisory

scenario variables and any additional

variables chosen by the company. A

company’s estimation processes should

reasonably capture the relationship

between the assumed scenario

conditions and the projected impacts

and outcomes to the company. The

agencies expect that the specific

methodological practices used by

companies to produce the estimates may

vary across organizations.

Supervisors generally expect that all

banking organizations, as part of overall

safety and soundness, will continue to

enhance their risk management

practices. Accordingly, a $10–50 billion

company’s DFA stress testing practices

should evolve and improve over time. In

addition, DFA stress testing practices for

$10–50 billon companies should be

commensurate with each company’s

size, complexity, and sophistication.

This means that, generally, larger or

more sophisticated companies should

employ not just the minimum

expectations, but the more advanced

practices described in this guidance.

The remainder of this section outlines

key practices that all $10–50 billion

companies should incorporate into their

methodologies for estimating losses,

PPNR, PLLL, and net income. It begins

with general expectations that apply

across various types of estimation

methodologies, and then provides

additional expectations for specific

areas, such as loss estimation, revenue

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mating losses,

PPNR, PLLL, and net income. It begins

with general expectations that apply

across various types of estimation

methodologies, and then provides

additional expectations for specific

areas, such as loss estimation, revenue

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20 For purposes of this guidance, the term ‘‘$10–

50 billion reporting form’’ refers to the relevant

reporting form a $10–50 billion company will use

to report the results of its DFA stress tests to its

primary Federal financial regulatory agency. For

Federal Reserve-regulated companies the relevant

reporting form is the FR Y–16, for OCC-regulated

companies the relevant form is the OCC DFAST 10–

50, and for FDIC-regulated companies the relevant

form is the FDIC DFAST 10–50.

21 OCC 2011–12 and FR SR 11–7.

estimation, and balance sheet

projections. In making projections,

companies should make conservative

assumptions about management

responses in the stress tests, and should

include only those responses for which

there is substantial support. For

example, companies may account for

hedges that are already in place as

potential mitigating factors against

losses but should be conservative in

making assumptions about potential

future hedging activities and not

necessarily anticipate that actions taken

in the past could be taken under the

supervisory scenarios.

1. Data Sources

Companies are expected to have

appropriate management information

systems and data processes that enable

them to collect, sort, aggregate, and

update data and other information

efficiently and reliably within business

lines and across the company for use in

DFA stress tests. Data used for DFA

stress tests should be reliable and

generally consistent across time

scenarios.

1. Data Sources

Companies are expected to have

appropriate management information

systems and data processes that enable

them to collect, sort, aggregate, and

update data and other information

efficiently and reliably within business

lines and across the company for use in

DFA stress tests. Data used for DFA

stress tests should be reliable and

generally consistent across time.

In cases where a company may not

currently have a full cycle of historical

data or data in sufficient granularity on

which to base its analyses, it may use an

alternative data source, such as a data

history drawn from other organizations

of demonstrably comparable market

presence, concentrations, and risk

profile (for example, regulatory

reporting or vendor-supplied data), as a

proxy for its own risk profile and

exposures. Companies with limited

internal data should develop specific

strategies to accumulate the data

necessary to improve their estimation

practices over time, as having internal

data relevant to current exposures

generally improves loss projections and

provides a better basis for assessment of

those projections.

Over the long term, companies may

continue to use such proxy data to

benchmark the estimates produced

using internal data or to augment any

gaps in internal data (for example, if a

company is moving into a new business

area). However, companies should use

proxy data cautiously, as these data may

not adequately represent a company’s

own exposures, business activities,

underwriting, and risk characteristics.

Even when a company has extensive

historical data, it should look beyond

the assumptions based on or embedded

in those historical data. Companies

should challenge conventional

assumptions to ensure that a company’s

stress test is not constrained by its own

past experience

may

not adequately represent a company’s

own exposures, business activities,

underwriting, and risk characteristics.

Even when a company has extensive

historical data, it should look beyond

the assumptions based on or embedded

in those historical data. Companies

should challenge conventional

assumptions to ensure that a company’s

stress test is not constrained by its own

past experience. This is particularly

important when historical data does not

contain stressful periods or if the

specific characteristics of the scenarios

are unlike the conditions in the

available historical data.

2. Data Segmentation

To account for differences in risk

profiles across various exposures and

activities, companies should segment

their portfolios and business activities

into categories based on common or

related risk characteristics. The

company should select the appropriate

level of segmentation based on the size,

materiality, and risk of a given portfolio,

provided there are sufficiently granular

historical data available to allow for the

desired segmentation. The minimum

expectation is that companies will

segment their portfolios and business

activities using the categories listed in

the $10–50 billion reporting form.20 A

company may use more granular

segmentation than the $10–50 billion

reporting form categories, particularly

for more material, concentrated, or

relatively riskier portfolios. For

instance, a company could have a

commercial loan portfolio containing

loans to different industries with

varying sensitivities to the scenario

variables.

More advanced portfolio

segmentation can take several forms,

such as by product (construction versus

income-producing real estate), industry,

loan size, credit quality, collateral type,

geography, vintage, maturity, debt

service coverage, or loan-to-value (LTV)

ratio. The company may also pool

exposures with common or correlated

risk characteristics, such as segmenting

loans to businesses related to

automobile production

on can take several forms,

such as by product (construction versus

income-producing real estate), industry,

loan size, credit quality, collateral type,

geography, vintage, maturity, debt

service coverage, or loan-to-value (LTV)

ratio. The company may also pool

exposures with common or correlated

risk characteristics, such as segmenting

loans to businesses related to

automobile production. Companies may

also segment the portfolio according to

geography, if they engage in activities in

geographic areas with differing

economic and financial characteristics.

Such segmentation may be particularly

valuable in situations where geographic

areas show varying sensitivity to

national economic and financial

changes or where different scenario

variables are necessary to capture key

risks (such as projecting wholesale loan

losses for regions with different

industrial concentrations). For any type

of segmentation that is more granular

than the categories in the $10–50 billion

reporting form, a company should

maintain a map of internally defined

segments to the $10–50 billion reporting

form categories for accurate reporting.

Some companies’ business line or risk

assessment functions may already

segment data with more granularity, i.e.,

beyond the $10–50 billion reporting

form categories, which would support

their DFA stress tests. Enhanced data

details on borrower and loan

characteristics may identify distinct and

separate credit risks within a reporting

category more effectively, and therefore

yield a more accurate risk assessment

than simply analyzing the larger

aggregate portfolio. Greater

segmentation, particularly for larger or

riskier portfolios, may prove especially

useful in estimating the risks to a

portfolio under the adverse or severely

adverse scenarios, because aggregated or

less segmented portfolios may mask or

distort the effect of potentially more

stressful conditions on sub-portfolios

sk assessment

than simply analyzing the larger

aggregate portfolio. Greater

segmentation, particularly for larger or

riskier portfolios, may prove especially

useful in estimating the risks to a

portfolio under the adverse or severely

adverse scenarios, because aggregated or

less segmented portfolios may mask or

distort the effect of potentially more

stressful conditions on sub-portfolios.

While $10–50 billion reporting form

categories represent the minimum

acceptable segmentation, larger or more

sophisticated $10–50 billion companies

should consider whether that level of

segmentation is sufficient for the risk in

their portfolios.

3. Model risk management

Companies should have in place

effective model risk management

practices, including validation, for all

models used in DFA stress tests,

consistent with existing supervisory

guidance.21 This includes ensuring that

DFA stress test models are subject to

appropriate standards for model

development, implementation and use,

model validation and model

governance. Companies should ensure

an effective challenge process by

unbiased, competent, and qualified

parties is in place for all models. There

should also be sufficient documentation

of all models, including model

assumptions, limitations, and

uncertainties. Senior management

should have appropriate understanding

of DFA stress test models to provide

summary information to the company’s

board of directors that allows directors

to assess and question methodologies

and results.

Companies should ensure that their

model risk management policies and

practices generally apply to the use of

vendor and third-party products as well.

This includes all the standards and

expectations outlined above and in

existing supervisory guidance

o provide

summary information to the company’s

board of directors that allows directors

to assess and question methodologies

and results.

Companies should ensure that their

model risk management policies and

practices generally apply to the use of

vendor and third-party products as well.

This includes all the standards and

expectations outlined above and in

existing supervisory guidance. If a

company is using vendor models, senior

management is expected to demonstrate

knowledge of the model’s design,

intended use, applications, limitations

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and assumptions. For cases in which

knowledge about a vendor or third-party

model is limited for proprietary or other

reasons, companies should take

additional steps to ensure that they have

an understanding of the model and can

confirm it is functioning as intended.

For example, companies may need to

conduct more sensitivity analysis and

benchmarking if information about a

vendor model is limited for proprietary

or other reasons. Additionally, a

company should have as much in-house

knowledge as possible in the event of

vendor contract termination and should

have contingency plans in cases where

a vendor model is no longer available.

In cases where there are noted

weaknesses or limitations in models or

data used for stress tests, a company

may choose to apply qualitative

adjustments to the model or its output

that are expert judgment-based. In most

cases, however, estimation based solely

or heavily reliant on qualitative

adjustments should not be the main

component of final loss estimates

odel is no longer available.

In cases where there are noted

weaknesses or limitations in models or

data used for stress tests, a company

may choose to apply qualitative

adjustments to the model or its output

that are expert judgment-based. In most

cases, however, estimation based solely

or heavily reliant on qualitative

adjustments should not be the main

component of final loss estimates.

Where qualitative adjustments are

made, they should be consistently

determined and applied, and subject to

a well-defined process that includes a

well-supported rationale, methodology,

proper controls and strong

documentation. When expert judgment

is used on an ongoing basis, the

estimates generated by such judgment

should be subject to outcomes analysis,

to assess performance equivalent to that

used to evaluate a quantitative model.

Large qualitative adjustments to the

stress test results, especially on a

repeated basis, may be indicative of a

flawed process.

4. Loss estimation

For their DFA stress tests, companies

are expected to have credible loss

estimation practices that capture the

risks associated with their portfolios,

business lines, and activities. Credit

losses associated with loan portfolios

and securities holdings should be

estimated directly and separately (as

described in this section), whereas other

types of losses should be incorporated

into estimated PPNR (as described in

the next section). Processes for loss

estimation should be consistent,

repeatable, transparent, and well

documented. Companies should have a

transparent and consistent approach for

aggregating loss estimates across the

enterprise. For example, inputs from all

parts of the company should rely on

common assumptions and map to

specific loss categories of the $10–50

billion reporting form

n

the next section). Processes for loss

estimation should be consistent,

repeatable, transparent, and well

documented. Companies should have a

transparent and consistent approach for

aggregating loss estimates across the

enterprise. For example, inputs from all

parts of the company should rely on

common assumptions and map to

specific loss categories of the $10–50

billion reporting form. A company

should ensure that all enterprise loss

estimation approaches reflect

reasonably sufficient rigor and

conservatism, and that, for loss

estimation, the scenarios are applied

consistently across the company.

Each company’s loss estimation

practices should be commensurate with

the materiality of the risks measured

and well supported by sound, empirical

analysis. The practices may vary in

complexity, depending on data

availability and the materiality of a

given portfolio. In general, loss

estimation practices for credit risk are

expected to be more advanced than

other elements of the stress test, given

that credit risk usually represents the

largest potential risk to capital adequacy

among $10–50 billion companies.

Companies should be mindful that the

credit performance in a benign

economic environment could differ

markedly from that during more

stressful periods, and the differences

could become greater as the severity of

stress increases. For example,

companies that experienced low losses

on their construction loans during a

benign economic environment, due to

the presence of interest reserves or other

risk mitigating factors, may experience a

sharp and rapid rise in losses in a

scenario where market conditions

deteriorate for a prolonged period. A

company’s decision whether to use

consistent or different loss estimation

processes for various supervisory

scenarios would depend on the

sensitivity of a company’s loss

estimation process to a given scenario

ce of interest reserves or other

risk mitigating factors, may experience a

sharp and rapid rise in losses in a

scenario where market conditions

deteriorate for a prolonged period. A

company’s decision whether to use

consistent or different loss estimation

processes for various supervisory

scenarios would depend on the

sensitivity of a company’s loss

estimation process to a given scenario.

A company may use a consistent

process for loss estimation for all

scenarios if that process is sufficiently

sensitive to the severity of each

scenario. Alternately, a company may

use different loss estimation processes

for different scenarios if the process it

uses for the baseline scenario does not

adequately capture the sensitivity of

loss estimates to adverse and severely

adverse scenarios. For example, a

company may use its budgeting process

for its baseline loss projections, if

appropriate, but it should use a different

process for the adverse and severely

adverse scenarios if its budgeting

process does not capture the potential

for sharply elevated losses during

stressful conditions. Whatever processes

a company chooses should be

conditioned on each of the three

macroeconomic scenarios provided by

supervisors.

Companies may choose loss

estimation processes from a range of

available methods, techniques, and

levels of granularity, depending on the

type and materiality of a portfolio, and

the type and quality of data available.

For instance, some companies may

choose to base their stress loss estimates

on industry historical loss experience,

provided that those estimates are

consistent with the conditions in the

supervisory scenarios. Companies

should choose a method that best serves

the structure of their credit portfolios,

and they may choose different methods

for different portfolios (for example,

wholesale versus retail)

some companies may

choose to base their stress loss estimates

on industry historical loss experience,

provided that those estimates are

consistent with the conditions in the

supervisory scenarios. Companies

should choose a method that best serves

the structure of their credit portfolios,

and they may choose different methods

for different portfolios (for example,

wholesale versus retail). Furthermore,

companies may use multiple methods to

estimate losses on any given credit

portfolio, and investigate different

methods before settling on a particular

approach or approaches. Regardless of

whether a company uses historical loss

experience or a more sophisticated

modeling technique to estimate losses in

a given scenario, the company should

verify that resulting loss estimates are

appropriately conditioned on the

scenario, and any assumptions used are

well understood and documented.

In estimating losses based on

historical experiences, companies

should ensure that historical loss

experience contains at least one period

when losses were substantially elevated

and revenues substantially reduced,

such as the downturn of a credit cycle.

In addition, companies should ensure

that any historical loss data used are

consistent with the company’s current

exposures and condition. This could

occur, for instance, if a company has

shifted the proportion of its commercial

lending from large corporations to

smaller businesses, and the shift is not

appropriately reflected in its historical

loss data. If neither a company’s own

data history nor industry loss data

include periods of stress comparable to

the supervisory adverse or severely

adverse scenario, the company should

make reasonable, conservative

assumptions based on available data.

Companies may choose to estimate

credit losses at an aggregate level, at a

loan-segment level, or at a loan-by-loan

level

ts historical

loss data. If neither a company’s own

data history nor industry loss data

include periods of stress comparable to

the supervisory adverse or severely

adverse scenario, the company should

make reasonable, conservative

assumptions based on available data.

Companies may choose to estimate

credit losses at an aggregate level, at a

loan-segment level, or at a loan-by-loan

level. Aggregate approaches generally

involve estimating loan losses for

portfolios of loans, such as the $10–50

billion reporting form categories or more

granular categories. Loan segmentation

approaches group individual loans into

segments or pools of obligors with

similar risk characteristics to estimate

losses. For example, individual 30-year

fixed-rate mortgage loans may be pooled

into one segment, and 5-year adjustable-

rate mortgages (ARMs) into another

segment, each to be modeled separately

based on the balance, loss, and default

history in that loan segment. Loan

segments can also be determined based

on additional risk characteristics, such

as credit score, LTV ratio, borrower

location, and payment status. Finally,

loan-level approaches estimate losses

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22 The DFA stress test rules define PPNR as net

interest income plus non-interest income less non-

interest expense. Non-operational or non-recurring

income and expense items should be excluded.

for each loan or borrower and aggregate

those estimates to arrive at portfolio-

level losses.

Some of the more commonly used

modeling techniques for estimating loan

losses include net charge-off models,

roll-rate models, and transition

matrices

nterest income plus non-interest income less non-

interest expense. Non-operational or non-recurring

income and expense items should be excluded.

for each loan or borrower and aggregate

those estimates to arrive at portfolio-

level losses.

Some of the more commonly used

modeling techniques for estimating loan

losses include net charge-off models,

roll-rate models, and transition

matrices. Net charge-off models

typically estimate the net charge-off rate

for a given portfolio, based on the

historical relationship between the net

charge offs and relevant risk factors,

including macroeconomic variables.

Roll-rate models generally estimate the

rate at which loans that are current or

delinquent in a given quarter roll into

delinquent or default status in the next

quarter, conditioning such estimates on

relevant risk factors. Transition matrices

estimate the probability that risk ratings

on loans could change from quarter to

quarter and observe how transition rates

differ in stressful periods compared

with less stressful or baseline periods.

Some companies may also use an

expected loss approach, where the

probability of default, loss given default,

and exposure at default are estimated

for individual loans, conditioning such

estimates on each loan or portfolio risk

characteristics and the economic

scenario. Companies can benefit from

exploring different modeling

approaches, giving due consideration to

cost effectiveness and with the

understanding that more sophisticated

methodologies will not necessarily

prove more practicable or robust.

Loss estimation practices should be

commensurate with the overall size,

complexity and sophistication of the

company, as well as with individual

portfolios, to ensure they fully capture

a company’s risk profile. Accordingly,

smaller, less sophisticated $10–50

billion companies may employ simpler

loss estimation practices that rely on

industry historical loss experience at a

higher level of aggregation

n practices should be

commensurate with the overall size,

complexity and sophistication of the

company, as well as with individual

portfolios, to ensure they fully capture

a company’s risk profile. Accordingly,

smaller, less sophisticated $10–50

billion companies may employ simpler

loss estimation practices that rely on

industry historical loss experience at a

higher level of aggregation. On the other

hand, larger or more sophisticated $10–

50 billion companies should consider

more advanced loss estimation practices

that identify the key drivers of losses for

a given portfolio, segment, or loan,

determine how those drivers would be

affected in supervisory scenarios, and

estimate resulting losses.

Loss projections should include

projections of other-than-temporary

impairments (OTTI) for securities both

held for sale and held to maturity. OTTI

projections should be based on

positions as of September 30 and should

be consistent with the supervisory

scenarios and standard accounting

treatment. Companies should ensure

that their securities loss estimation

practices, including definitions of loss

used, remain current with regulatory

and accounting changes.

5. Pre-provision net revenue estimation

The projection of potential revenues

is a key element of a stress test. For the

DFA stress test, companies are required

to project PPNR over the planning

horizon for each supervisory scenario.22

Companies should estimate PPNR at a

level at least as granular as the

components outlined in the $10–50

billion reporting form. Companies

should be mindful that revenue patterns

could differ markedly in baseline versus

stress periods, and should therefore not

make assumptions that revenue streams

will remain the same or follow similar

paths across all scenarios

ch supervisory scenario.22

Companies should estimate PPNR at a

level at least as granular as the

components outlined in the $10–50

billion reporting form. Companies

should be mindful that revenue patterns

could differ markedly in baseline versus

stress periods, and should therefore not

make assumptions that revenue streams

will remain the same or follow similar

paths across all scenarios. In estimating

PPNR, companies should consider,

among other things, how potentially

higher nonaccruals, increased collection

costs, and changes in funding sources

during the adverse and severely adverse

scenarios could affect PPNR. Companies

should ensure that PPNR projections are

generally consistent with projections of

losses, the balance sheet, and risk-

weighted assets. For example, if a

company projects that loan losses would

be reduced because of declining loan

balances under a severely adverse

scenario, PPNR would also be expected

to decline under the same scenario due

to the decline in interest income.

Companies should ensure transparency

and appropriate documentation of all

material assumptions related to PPNR.

There are various ways to estimate

PPNR under stress scenarios and

companies are not required to use any

specific method. For example,

companies may project each of three

main components of PPNR (net interest

income, non-interest income, and non-

interest expense) or sub-components of

PPNR (e.g., interest income or fee

income), on an aggregate level for the

entire company or by business line.

Companies may base their PPNR

estimates on internal or industry

historical experience, or use a more

sophisticated model-based approach to

project PPNR. For example, some

companies may project PPNR based on

a historical relationship between PPNR

or broad components of PPNR and

macroeconomic variables. In those

instances, companies may use the level

of PPNR or the ratio of PPNR to a

relevant balance sheet measure, such as

assets or loans

or industry

historical experience, or use a more

sophisticated model-based approach to

project PPNR. For example, some

companies may project PPNR based on

a historical relationship between PPNR

or broad components of PPNR and

macroeconomic variables. In those

instances, companies may use the level

of PPNR or the ratio of PPNR to a

relevant balance sheet measure, such as

assets or loans. Some companies may

use a more granular breakout of PPNR

(for example, interest income on loans),

identify relevant economic variables (for

example, interest rates), and employ

models based on historical data to

project PPNR. Some companies may use

their asset-liability management models

to project some components of PPNR,

such as net interest income.

A company may estimate the stressed

components of PPNR based on its own

or industry-wide historical income and

expense experience, particularly during

the early development of a company’s

stress testing practices. When using its

own history, a company should ensure

that the data include at least one

stressful period; when using industry

data, a company should ensure that

such data are relevant to its portfolios

and businesses and appropriately reflect

potential PPNR under each supervisory

scenario. If neither its own data nor

industry data include the period of

stress that is comparable to the

supervisory adverse or severely adverse

scenario, a company should make

conservative assumptions, based on

available data, and appropriately adjust

its historical PPNR data downward in

its stressed estimate. A company that

has been experiencing merger activity,

rapid growth, volatile revenues, or

changing business models should rely

less on its own historical experience,

and generally make conservative

assumptions.

Smaller or less sophisticated $10–50

billion companies may employ PPNR

estimation approaches that project the

three main components of PPNR at the

aggregate, company-wide level based on

industry experience

eriencing merger activity,

rapid growth, volatile revenues, or

changing business models should rely

less on its own historical experience,

and generally make conservative

assumptions.

Smaller or less sophisticated $10–50

billion companies may employ PPNR

estimation approaches that project the

three main components of PPNR at the

aggregate, company-wide level based on

industry experience. Larger or more

sophisticated $10–50 billion companies

should consider PPNR estimation

practices that more fully capture

potential risks to their business and

strategy by collecting internal revenue

data, estimating revenues within

specific business lines, exploring more

advanced techniques that identify the

specific drivers of revenue, and

analyzing how the supervisory scenarios

affect those revenue drivers. Whatever

process a company chooses to employ,

projected revenues and expenses should

be credible and reflect a reasonable

translation of expected outcomes

consistent with the key scenario

variables.

In addition to the credit losses

associated with loan portfolios and

securities holdings, described in the

previous section, that should be

estimated directly and separately,

companies may determine that other

types of losses could arise under the

supervisory scenarios. These other types

of losses should be included in

projections of PPNR to the extent they

would arise under the specified scenario

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arately,

companies may determine that other

types of losses could arise under the

supervisory scenarios. These other types

of losses should be included in

projections of PPNR to the extent they

would arise under the specified scenario

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conditions. For example, any trading

losses arising from the scenario

conditions should be included in the

non-interest income component of

PPNR. As another example, companies

should estimate under the non-interest

expense component of PPNR any losses

associated with requests by mortgage

investors—including both government-

sponsored enterprises as well as private-

label securities holders—to repurchase

loans deemed to have breached

representations and warranties, or with

investor litigation that broadly seeks

damages from companies for losses.

Companies with material

representation and warranty risk may

consider a range of legal process

outcomes, including worse than

expected resolutions of the various

contract claims or threatened or pending

litigation against a company and against

various industry participants.

Additionally, in estimating non-interest

income, companies with significant

mortgage servicing operations should

consider the effect of the supervisory

scenarios on revenue and expenses

related to mortgage servicing rights and

the associated impact to regulatory

capital.

PPNR estimates should also include

any operational losses that a company

estimates based on the supervisory

scenarios provided. Companies should

address operational risk in their PPNR

projections if such events are related to

the supervisory scenarios provided, or if

there are pending related issues, such as

ongoing litigation, that could affect

losses or revenues over the planning

horizon.

6

stimates should also include

any operational losses that a company

estimates based on the supervisory

scenarios provided. Companies should

address operational risk in their PPNR

projections if such events are related to

the supervisory scenarios provided, or if

there are pending related issues, such as

ongoing litigation, that could affect

losses or revenues over the planning

horizon.

6. Balance sheet and risk-weighted asset

projections

A company is expected to project its

balance sheet and risk-weighted assets

for each of the supervisory scenarios. In

doing so, these projections should be

consistent with scenario conditions and

the company’s prior history of managing

through the different business

environments, especially stressful ones.

For example, if a company has reduced

its business activity and balance sheet

during past periods of stress or if it has

contingent exposures, that should be

taken into consideration. The

projections of the balance sheet and

risk-weighted assets should be

consistent with other aspects of stress

test projections, such as losses and

PPNR. In addition, balance sheet and

risk-weighted asset projections should

remain current with regulatory and

accounting changes.

Companies may use a variety of

methods to project balance sheet and

risk-weighted assets. In certain cases, it

may be appropriate for a company to

use simpler approaches for balance

sheet and risk-weighted asset

projections, such as a constant-portfolio

assumption. Alternatively, a company

may rely on estimates of changes in

balance sheet and risk-weighted assets

based on their own or industry-wide

historical experience, provided that the

internal or external historical balance

sheet and risk-weighted asset

experience contains stressful periods

pproaches for balance

sheet and risk-weighted asset

projections, such as a constant-portfolio

assumption. Alternatively, a company

may rely on estimates of changes in

balance sheet and risk-weighted assets

based on their own or industry-wide

historical experience, provided that the

internal or external historical balance

sheet and risk-weighted asset

experience contains stressful periods.

As in the case of loss estimation and

PPNR, using industry-wide data might

be more appropriate when internal data

lack sufficient history, granularity, or

observations from stressful periods;

however, companies should take

caution when using the industry data

and provide appropriate documentation

for all material assumptions.

In stress scenarios, companies should

justify major changes in the composition

of risk-weighted assets, for example,

based on assumptions about a

company’s strategic direction, including

events such as material sales, purchases,

or acquisitions. Furthermore, companies

should be mindful that any assumptions

about reductions in business activity

that would reduce its balance sheet and

risk-weighted assets over the planning

horizon (such as tightened

underwriting) are also likely to reduce

PPNR. Such assumptions should also be

reasonable in that they do not

substantially alter the company’s core

businesses and earnings capacity.

Companies should document and

explain key underlying assumptions, as

appropriate.

Some companies may choose to

employ more advanced, model-based

approaches to project balance sheet and

risk-weighted assets. For example, a

company may project outstanding

balances for assets and liabilities based

on the historical relationship between

those balances and macroeconomic

variables. In other cases, a company

could project certain components of the

balance sheet, for example, based on

projections for originations, pay-downs,

drawdowns, and losses for its loan

portfolios under each scenario

assets. For example, a

company may project outstanding

balances for assets and liabilities based

on the historical relationship between

those balances and macroeconomic

variables. In other cases, a company

could project certain components of the

balance sheet, for example, based on

projections for originations, pay-downs,

drawdowns, and losses for its loan

portfolios under each scenario.

Estimated prepayment behavior

conditioned on the relevant scenario

and the maturity profile of the asset

portfolio could inform balance

projections.

7. Estimates for immaterial portfolios

Although stress testing should be

applied to all exposures as described

above, the same level of rigor and

analysis may not be necessary for lower-

risk, immaterial, portfolios. Portfolios

considered immaterial are those that

would not represent a consequential

effect on capital adequacy under any of

the scenarios provided. For such

portfolios, it may be appropriate for a

company to use a less sophisticated

approach for its stress test projections,

provided that the results of that

approach are conservative and well

documented. For example, estimating

losses under the supervisory scenarios

for a small portfolio of municipal

securities may not involve the same

sophistication as a larger portfolio of

commercial mortgages.

8. Projections for quarterly provisions

and ending allowance for loan and lease

losses

The DFA stress test rules require

companies to project quarterly PLLL.

Companies are expected to project PLLL

based on projections of quarterly loan

and lease losses and the appropriate

ALLL balance at each quarter-end for

each scenario. In projecting PLLL,

companies are expected to maintain an

adequate loan-loss reserve through the

planning horizon, consistent with

supervisory guidance, accounting

standards, and a company’s internal

practice

arterly PLLL.

Companies are expected to project PLLL

based on projections of quarterly loan

and lease losses and the appropriate

ALLL balance at each quarter-end for

each scenario. In projecting PLLL,

companies are expected to maintain an

adequate loan-loss reserve through the

planning horizon, consistent with

supervisory guidance, accounting

standards, and a company’s internal

practice. Estimated provisions should

recognize the potential need for higher

reserve levels in the adverse and

severely adverse scenarios, since

economic stress leads to poorer loan

performance. The ALLL at the end of

the planning horizon should be

consistent with GAAP, including any

losses projected beyond the nine-quarter

horizon.

9. Projections for quarterly net income

Under the DFA stress test rules,

companies must estimate projected

quarterly net income for each scenario.

Net income projections should be based

on loss, revenue, and expense

projections described above. Companies

should also ensure that tax estimates,

including deferred taxes and tax assets,

are consistent with relevant balance

sheet and income (loss) assumptions

and reflect appropriate accounting, tax,

and regulatory changes.

D. Estimating the Potential Impact on

Regulatory Capital Levels and Capital

Ratios

Rule Requirement: In conducting a

stress test, for each quarter of the

planning horizon a company must

estimate: the potential impact on

regulatory capital levels and capital

ratios (including regulatory capital

ratios and any other capital ratios

specified by the primary supervisor),

incorporating the effects of any capital

actions over the planning horizon and

maintenance of an allowance for loan

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capital

ratios (including regulatory capital

ratios and any other capital ratios

specified by the primary supervisor),

incorporating the effects of any capital

actions over the planning horizon and

maintenance of an allowance for loan

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23 12 CFR 46.6(a)(2) (OCC); 12 CFR 252.155(a)(2)

(Board); 12 CFR 325.205(a)(2) (FDIC).

24 12 CFR 252.155(b).

25 12 CFR 46.5(d) (OCC); 12 CFR 252.155(c)

(Board); 12 CFR 325.205(b) (FDIC).

losses appropriate for credit exposures

throughout the planning horizon.23

In the DFA stress test rules,

companies are required to estimate the

impact of supervisory scenarios on

capital levels and ratios, based on the

estimates of losses, PPNR, loan and

lease provisions, and net income, as

well as projections of the balance sheet

and risk-weighted assets. Companies

must estimate projected quarterly

regulatory capital levels and regulatory

capital ratios for each scenario. The

agencies expect companies’ post-stress

capital ratios under the adverse and

severely adverse scenarios will be lower

than under the baseline scenario.

Projected capital levels and ratios

should reflect applicable regulations

and accounting standards for each

quarter of the planning horizon.

In particular, in July 2013, the Board

and OCC issued a final rule and the

FDIC issued an interim final rule

regarding regulatory capital

requirements for banking organizations.

The final rules revise the criteria for

regulatory capital, introduce a new

minimum common equity tier 1 capital

requirement of 4.5 percent of risk-

weighted assets, as well as a minimum

supplementary leverage ratio

requirement of 3 percent that would

apply to companies subject to the

advanced approaches capital rules

regarding regulatory capital

requirements for banking organizations.

The final rules revise the criteria for

regulatory capital, introduce a new

minimum common equity tier 1 capital

requirement of 4.5 percent of risk-

weighted assets, as well as a minimum

supplementary leverage ratio

requirement of 3 percent that would

apply to companies subject to the

advanced approaches capital rules. The

new minimum capital requirements

would be phased in over a transition

period. The final rules will take effect

beginning on January 1, 2014, for

banking organizations subject to the

agencies’ advanced approaches rules

(other than savings and loan holding

companies) and on January 1, 2015, for

all other banking organizations.

Compliance with the supplementary

leverage ratio for companies subject to

the advanced approaches rules will be

required starting in 2018. $10–50 billion

companies should measure their

regulatory capital levels and regulatory

capital ratios for each quarter in

accordance with the rules that would be

in effect during that quarter in

accordance with the transition

arrangements set forth in the final rules.

Rule Requirement: A bank holding

company or savings and loan holding

company is required to make the

following assumptions regarding its

capital actions over the planning

horizon:

1. For the first quarter of the planning

horizon, the bank holding company

or savings and loan holding

company must take into account its

actual capital actions as of the end

of that quarter.

2. For each of the second through ninth

quarters of the planning horizon,

the bank holding company or

savings and loan holding company

must include in the projections of

capital:

(a) Common stock dividends equal to

the quarterly average dollar

amount of common stock dividends

that the company paid in the

previous year (that is, the first

quarter of the planning horizon

and the preceding three calendar

quarters);

ough ninth

quarters of the planning horizon,

the bank holding company or

savings and loan holding company

must include in the projections of

capital:

(a) Common stock dividends equal to

the quarterly average dollar

amount of common stock dividends

that the company paid in the

previous year (that is, the first

quarter of the planning horizon

and the preceding three calendar

quarters);

(b) Payments on any other instrument

that is eligible for inclusion in the

numerator of a regulatory capital

ratio equal to the stated dividend,

interest, or principal due on such

instrument during the quarter; and

(c) An assumption of no redemption

or repurchase of any capital

instrument that is eligible for

inclusion in the numerator of a

regulatory capital ratio.24

In their DFA stress tests, bank holding

companies and savings and loan

holding companies are required to

calculate pro forma capital ratios using

a set of capital action assumptions based

on historical distributions, contracted

payments, and a general assumption of

no redemptions, repurchases, or

issuances of capital instruments. A

holding company should also assume it

will not issue any new common stock,

preferred stock, or other instrument that

would count in regulatory capital in the

second through ninth quarters of the

planning horizon, except for any

common issuances related to expensed

employee compensation.

While holding companies are required

to use specified capital action

assumptions, there are no specified

capital actions for banks and thrifts. A

bank or thrift should use capital actions

that are consistent with the scenarios

and the company’s internal practices in

their DFA stress tests. For banks and

thrifts, projections of dividends that

represent a significant change from

practice in recent quarters, for example

to conserve capital in a stress scenario,

should be evaluated in the context of

corporate restrictions and board

decisions in historical stress periods

tions

that are consistent with the scenarios

and the company’s internal practices in

their DFA stress tests. For banks and

thrifts, projections of dividends that

represent a significant change from

practice in recent quarters, for example

to conserve capital in a stress scenario,

should be evaluated in the context of

corporate restrictions and board

decisions in historical stress periods.

Additionally, a holding company

should consider that it is required to use

certain capital assumptions that may not

be the same as the assumptions used by

its bank subsidiaries. Finally, any

assumptions about mergers or

acquisitions, and other strategic actions

should be well documented and should

be consistent with past practices of

management and the board during

stressed economic periods. Should the

stress-test submissions for the bank or

thrift and its holding company differ in

terms of projected capital actions (e.g.,

different dividend payout assumptions

during the stress test horizon for the

bank versus the holding company) as a

result of the different requirements of

the DFA stress test rules, the institution

should address such differences in the

narrative portion of their submissions.

E. Controls, Oversight, and

Documentation

Rule requirement: Senior management

must establish and maintain a system of

controls, oversight and documentation,

including policies and procedures, that

are designed to ensure that its stress

testing processes are effective in

meeting the requirements of the DFA

stress test rule. These policies and

procedures must, at a minimum,

describe the company’s stress testing

practices and methodologies, and

describe the processes for validating

and updating practices and

methodologies consistent with

applicable laws, regulations, and

supervisory guidance

ned to ensure that its stress

testing processes are effective in

meeting the requirements of the DFA

stress test rule. These policies and

procedures must, at a minimum,

describe the company’s stress testing

practices and methodologies, and

describe the processes for validating

and updating practices and

methodologies consistent with

applicable laws, regulations, and

supervisory guidance. The board of

directors, or a committee thereof, of a

company must approve and review the

policies and procedures of the stress

testing processes as frequently as

economic conditions or the condition of

the company may warrant, but no less

than annually.25

Pursuant to the DFA stress test

requirement, a company must establish

and maintain a system of controls,

oversight, and documentation,

including policies and procedures that

apply to all of its DFA stress test

components. This system of controls,

oversight, and documentation should be

consistent with the May 2012 stress

testing guidance. Policies and

procedures for DFA stress tests should

be comprehensive, ensure a consistent

and repeatable process, and provide

transparency regarding a company’s

stress testing processes and practices for

third parties. The policies and

procedures should provide a clear

articulation of the manner in which

DFA stress tests should be conducted,

roles and responsibilities of parties

involved (including any external

resources), and describe how DFA stress

test results are to be used. These

policies and procedures also should be

integrated into other policies and

procedures for the company. The board

(or a committee thereof) must approve

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external

resources), and describe how DFA stress

test results are to be used. These

policies and procedures also should be

integrated into other policies and

procedures for the company. The board

(or a committee thereof) must approve

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26 12 CFR 46.5(d) and 46.6(c)(2) (OCC); 12 CFR

252.155(c)(3) (Board); 12 CFR 325.205(b)(2) and (3)

(FDIC).

27 12 CFR 46.7 (OCC); 12 CFR 252.156 (Board); 12

CFR 325.206 (FDIC).

28 12 CFR 46.8 (OCC); 12 CFR 252.157 (Board); 12

CFR 325.207 (FDIC).

29 12 CFR 252.157(b).

and review the policies and procedures

for DFA stress tests to ensure that

policies and procedures remain current,

relevant, and consistent with existing

regulatory and accounting requirements

and expectations as frequently as

economic conditions or the condition of

the company may warrant, but no less

than annually.

Senior management must establish

policies and procedures for DFA stress

tests and should ensure compliance

with those policies and procedures,

assign competent staff, oversee stress

test development and implementation,

evaluate stress test results, and review

any findings related to the functioning

of stress testing processes. Senior

management should ensure that

weaknesses—as well as key

assumptions, limitations and

uncertainties—in DFA stress testing

processes and results are identified,

communicated appropriately within the

organization, and evaluated for the

magnitude of impact, taking prompt

remedial action where necessary

s, and review

any findings related to the functioning

of stress testing processes. Senior

management should ensure that

weaknesses—as well as key

assumptions, limitations and

uncertainties—in DFA stress testing

processes and results are identified,

communicated appropriately within the

organization, and evaluated for the

magnitude of impact, taking prompt

remedial action where necessary. Senior

management, directly and through

relevant committees, should also be

responsible for regularly reporting to the

board regarding DFA stress test

developments (including the process to

design tests and augment or map

supervisory scenarios), DFA stress test

results, and compliance with a

company’s stress testing policy.

A company’s system of

documentation should include the

methodologies used, data types, key

assumptions, and results, as well as

coverage of the DFA stress tests

(including risks and exposures

included). For any models used,

documentation should include

sufficient detail about design, inputs,

assumptions, specifications, limitations,

testing, and output. In general,

documentation on methodologies used

should be consistent with existing

supervisory guidance.

Companies should ensure that other

aspects of governance over

methodologies used for DFA stress tests

are appropriate, consistent with the May

2012 stress testing guidance.

Specifically, companies should have

policies, procedures, and standards for

any models used. Effective governance

would include validation and effective

challenge for any assumptions or

models used, and a description of any

remedial steps in cases where models

are not validated or validation identifies

substantial issues. A company should

ensure that internal audit evaluates

model risk management activities

related to DFA stress tests, which

should include a review of whether

practices align with policies, as well as

how deficiencies are identified,

monitored, and addressed

ls used, and a description of any

remedial steps in cases where models

are not validated or validation identifies

substantial issues. A company should

ensure that internal audit evaluates

model risk management activities

related to DFA stress tests, which

should include a review of whether

practices align with policies, as well as

how deficiencies are identified,

monitored, and addressed.

Rule requirements: The board of

directors and senior management of the

company must receive a summary of

the results of the stress test. The board

of directors and senior management of

a company must consider the results of

the stress test in the normal course of

business, including, but not limited to,

the company’s capital planning,

assessment of capital adequacy, and

risk management practices.26

A company’s board of directors is

ultimately responsible for the

company’s DFA stress tests. Board

members must receive summary

information about DFA stress tests,

including results from each scenario.

The board or its designee should

actively evaluate and discuss this

information, ensuring that the DFA

stress tests appropriately reflect the

company’s risk appetite, overall strategy

and business plans, overall stress testing

practices, and contingency plans,

directing changes where appropriate.

The board should ensure it remains

informed about critical review of

elements of the DFA stress tests

conducted by senior management or

others (such as internal audit),

especially regarding key assumptions,

uncertainties, and limitations.

All $10–50 billion companies must

consider the role of stress testing results

in normal business including in the

capital planning, assessment of capital

adequacy, and risk management

practices of the company. A company

should document the manner in which

DFA stress tests are used for key

decisions about capital adequacy,

including capital actions and capital

contingency plans

itations.

All $10–50 billion companies must

consider the role of stress testing results

in normal business including in the

capital planning, assessment of capital

adequacy, and risk management

practices of the company. A company

should document the manner in which

DFA stress tests are used for key

decisions about capital adequacy,

including capital actions and capital

contingency plans. The company should

indicate the extent to which DFA stress

tests are used in conjunction with other

capital assessment tools, especially if

the DFA stress tests may not necessarily

capture a company’s full range of risks,

exposures, activities, and vulnerabilities

that have the potential to affect capital

adequacy. Importantly, a company

should ensure that its post-stress capital

results are aligned with its internal

capital goals and risk appetite. For cases

in which post-stress capital results are

not aligned with a company’s internal

capital goals, senior management should

provide options it and the board would

consider to bring them into alignment.

F. Report to Supervisors

Rule Requirement: A company must

report the results of the stress test to its

primary supervisor and to the Board of

Governors by March 31, in the manner

and form prescribed by the agency.27

All $10–50 billion companies must

report the results of their DFA company-

run stress tests on the $10–50 billion

reporting form. This report will include

a company’s quantitative projections of

losses, PPNR, balance sheet, risk-

weighted assets, ALLL, and capital on a

quarterly basis over the duration of the

scenario and planning horizon. In

addition to the quantitative projections,

companies are required to submit

qualitative information supporting their

projections

ess tests on the $10–50 billion

reporting form. This report will include

a company’s quantitative projections of

losses, PPNR, balance sheet, risk-

weighted assets, ALLL, and capital on a

quarterly basis over the duration of the

scenario and planning horizon. In

addition to the quantitative projections,

companies are required to submit

qualitative information supporting their

projections. The report of the stress test

results must include, under each

scenario: a description of the types of

risks included in the stress test, a

description of the methodologies used

in the stress test, an explanation of the

most significant causes for the changes

in regulatory capital ratios, and any

other information required by the

agencies. In addition, the agencies may

request supplemental information, as

needed.

If significant errors or omissions are

identified subsequent to filing, a

company must file an amended report.

For additional information, see the

instructions provided with the reporting

templates.

G. Public Disclosure of DFA Test

Results

Rule Requirement: A company must

disclose a summary of the results of the

stress test in the period beginning on

June 15 and ending on June 30.28

Under the DFA stress test rules, a

company must make its first DFA stress

test-related public disclosure between

June 15 and June 30, 2015, by disclosing

summary results of its annual DFA

stress test, using September 30, 2014,

financial statement data. The regulation

requires holding companies to include

in their public disclosure a summary of

the results of the stress tests conducted

by any subsidiaries subject to DFA

stress testing.29 A bank can satisfy this

public disclosure requirement by

including a summary of the results of its

stress test in its parent company’s

public disclosure (on the same

timeline); however the agencies can

require a separate disclosure if the

parent company’s public disclosure

does not adequately capture the impact

of the scenarios on the bank

ny subsidiaries subject to DFA

stress testing.29 A bank can satisfy this

public disclosure requirement by

including a summary of the results of its

stress test in its parent company’s

public disclosure (on the same

timeline); however the agencies can

require a separate disclosure if the

parent company’s public disclosure

does not adequately capture the impact

of the scenarios on the bank.

The summary of the results of the

stress test, including both quantitative

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and qualitative information, should be

included in a single release on a

company’s Web site, or in any other

forum that is reasonably accessible to

the public.

Each bank or thrift must publish a

summary of its stress tests results

separate from the results of stress tests

conducted at the consolidated level of

its parent holding company, but the

company may include this summary

with its holding company’s public

disclosure. Thus, a bank or thrift with

a parent holding company that is

required to conduct a company-run DFA

stress test under the Federal Reserve

Board’s DFA stress test rules will have

satisfied its public disclosures

requirement when the parent holding

company discloses summary results of

subsidiary’s annual stress test in

satisfaction of the requirements of the

applicable regulations of the company’s

primary Federal regulator, unless the

company’s primary regulator determines

that the disclosures at the holding

company level does not adequately

capture the potential impact of the

scenarios on the capital of the

companies.

A company must disclose, at a

minimum, the following information

regarding the severely adverse scenario:

a. A description of the types of risks

included in the stress test;

b

al regulator, unless the

company’s primary regulator determines

that the disclosures at the holding

company level does not adequately

capture the potential impact of the

scenarios on the capital of the

companies.

A company must disclose, at a

minimum, the following information

regarding the severely adverse scenario:

a. A description of the types of risks

included in the stress test;

b. A summary description of the

methodologies used in the stress

test;

c. Estimates of—

Aggregate losses;

PPNR;

PLLL;

Net income; and

Pro forma regulatory capital ratios and

any other capital ratios specified by

the primary supervisor;

d. An explanation of the most

significant causes for the changes in

regulatory capital ratios; and

e. For bank holding companies and

savings and loan holding

companies: for a stress test

conducted by an insured depository

institution subsidiary of the bank

holding company or savings and

loan holding company pursuant to

section 165(i)(2) of the Dodd-Frank

Act, changes in regulatory capital

ratios and any other capital ratios

specified by the primary Federal

financial regulatory agency of the

depository institution subsidiary

over the planning horizon,

including an explanation of the

most significant causes for the

changes in regulatory capital ratios.

It should be clear in the company’s

public disclosure that the results are

conditioned on the supervisory

scenarios. Items to be publicly disclosed

should follow the same definitions as

those provided in the confidential

report to supervisors. Companies should

disclose all of the required items in a

single public release, as it is difficult to

interpret the quantitative results

without the qualitative supporting

information.

DIFFERENCES IN DFA STRESS TEST REQUIREMENTS FOR HOLDING COMPANIES VERSUS BANKS AND THRIFTS

Bank Holding Companies and Savings and

Loan Holding Companies

Banks and Thrifts

Capital actions used for company-run stress

tests

disclose all of the required items in a

single public release, as it is difficult to

interpret the quantitative results

without the qualitative supporting

information.

DIFFERENCES IN DFA STRESS TEST REQUIREMENTS FOR HOLDING COMPANIES VERSUS BANKS AND THRIFTS

Bank Holding Companies and Savings and

Loan Holding Companies

Banks and Thrifts

Capital actions used for company-run stress

tests.

Capital actions prescribed in Federal Reserve

Board’s DFA stress tests rules. Generally

based on historical dividends, contracted

payments, and no repurchases or issuances.

No prescribed capital actions. Banks and

thrifts should use capital actions consistent

with the scenario and their internal business

practices.

Public disclosure of company-run stress tests ..

Disclosure must include information on stress

tests conducted by subsidiaries subject to

DFA stress tests.

Disclosure requirement met when parent com-

pany disclosure includes the required infor-

mation on the bank or thrift’s stress test re-

sults, unless the company’s primary regu-

lator determines that the disclosure at the

holding company level does not adequately

capture the potential impact of the sce-

narios on the capital of the company.

Dated: July 25, 2013.

Thomas J. Curry,

Comptroller of the Currency.

By order of the Board of Governors of the

Federal Reserve System, July 24, 2013.

Robert deV. Frierson,

Secretary of the Board.

Dated at Washington, DC, this 30th day of

July, 2013.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 2013–18716 Filed 8–2–13; 8:45 am]

BILLING CODE 4810–33–P; 6714–01–P; 6210–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA–2013–0561; Directorate

Identifier 2013–NE–23–AD]

RIN 2120–AA64

Airworthiness Directives; Thielert

Aircraft Engines GmbH Reciprocating

Engines

AGENCY: Federal Aviation

Administration (FAA), DOT.

ACTION: Notice of proposed rulemaking

(NPRM)

; 8:45 am]

BILLING CODE 4810–33–P; 6714–01–P; 6210–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA–2013–0561; Directorate

Identifier 2013–NE–23–AD]

RIN 2120–AA64

Airworthiness Directives; Thielert

Aircraft Engines GmbH Reciprocating

Engines

AGENCY: Federal Aviation

Administration (FAA), DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: We propose to adopt a new

airworthiness directive (AD) for all

Thielert Aircraft Engines GmbH TAE

125–01 reciprocating engines. This

proposed AD was prompted by a report

of engine power loss due to engine

coolant contaminating the engine

clutch. The design of the engine allows

the crankcase assembly opening to be

susceptible to contamination from

external sources. This proposed AD

would require applying sealant to close

the engine clutch housing (crankcase

assembly) opening. We are proposing

this AD to prevent in-flight engine

power loss, which could result in loss

of control of, and damage to, the

airplane.

DATES: We must receive comments on

this proposed AD by October 4, 2013.

ADDRESSES: You may send comments by

any of the following methods:

• Federal eRulemaking Portal: Go to

http://www.regulations.gov and follow

the instructions for sending your

comments electronically.

• Mail: Docket Management Facility,

U.S. Department of Transportation, 1200

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