Representing a significant change, the FDIC is requesting comment on a proposed rule that would amend the existing stress testing regulations to increase the minimum threshold for applicability from $10 billion to $250 billion, revise the frequency of required stress tests by FDIC-supervised institutions, and reduce the number of required stress testing scenarios from three to two.
This rule will reconcile the FDIC’s requirements with the legal changes made by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). EGRRCPA, which was passed on May 24, 2018, raises the minimum asset threshold for the company-run stress testing requirement from $10 billion to $250 billion, replaces the requirement for stress tests to be conducted “annually” with a requirement for them to be conducted “periodically,” and reduces the number of stress testing scenarios from three to two.
The revised definition of a “covered bank” is a State nonmember bank or State savings association with average total consolidated assets that are greater than $250 billion. This represents a change from the two categories of previously covered banks: $10 to $50 billion covered banks and over $50 billion covered banks. This will exclude roughly 130 banks from these provisions. These banks comprise roughly 1/3 of all bank assets totaling $6 trillion.
Frequency of stress testing
The new rule proposes that FDIC-supervised institutions that are covered banks will be required to conduct, report and publish a stress test every two years, beginning on January 1, 2020 and continuing on even number years thereafter.
However, some banks that are “subsidiaries of global systemically important bank holding companies or bank holding companies that have $700 billion or more in total assets or cross-jurisdictional activity of $75 billion or more would be required to conduct, report, and publish stress test results on the same schedule as their bank holding companies, which would be annually.”
Removal of the “adverse” scenario
Dodd-Frank required stress testing under three scenarios, “baseline,” “adverse,” and “severely adverse.” EGRRCPA amended this section of Dodd-Frank to no longer include the “adverse” scenario. The proposed rule also eliminates the requirement to include the “adverse” scenario because the FDIC believes this scenario provides limited incremental information above and beyond that provided by the other two scenarios.
In addition to these three major changes, the rule also makes changes to the transition process for covered banks, review by a covered bank’s board of directors, and other minor details. Instructions for submitting comments on the proposed rule can be found here, in the FDIC’s notice of proposed rulemaking.