AGENCY:

Federal Deposit Insurance Corporation.

ACTION:

Final rule.

SUMMARY:

The Federal Deposit Insurance Corporation (FDIC) is adopting a final rule to amend the FDIC's company-run stress testing regulations applicable to state nonmember banks and state savings associations, consistent with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). Specifically, the final rule revises the minimum threshold for applicability from $10 billion to $250 billion, revises the frequency of required stress tests by FDIC-supervised institutions, and reduces the number of required stress testing scenarios from three to two. The final rule also makes certain conforming and technical changes.

DATES:

The final rule is effective November 25, 2019.

FOR FURTHER INFORMATION CONTACT:

Ryan Sheller, Section Chief, (202) 412-4861, RSheller@FDIC.gov, Large Bank Supervision, Division of Risk Management Supervision; or Benjamin Klein, Counsel, (202) 898-7027, bklein@FDIC.gov; Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Policy Objective

The policy objective of the final rule is to conform the FDIC's regulations to section 401 of EGRRCPA, which raises the applicability threshold for company-run stress testing required by section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) from $10 billion to $250 billion, revises the required periodicity of such stress testing from “annual” to “periodic,” and removes the requirement that such stress testing include an “adverse” scenario.

II. Background

Prior to the enactment of EGRRCPA, section 165(i)(2) of the Dodd-Frank Act required a financial company, including an insured depository institution, with total consolidated assets of more than $10 billion and regulated by a primary federal regulatory agency to conduct annual stress tests and submit a report to the Board of Governors of the Federal Reserve System (Board) and to its primary federal regulatory agency.^[1] Section 165(i)(2)(C) required each primary federal regulator to issue consistent and comparable regulations to: (1) Implement the stress testing requirements, including establishing methodologies for conducting stress tests that provided for at least three different sets of conditions, including baseline, adverse, and severely adverse; (2) establish the form and content of the required reports, and (3) require companies to publish a summary of the stress test results.

In October 2012, the FDIC published in the Federal Register its rule implementing the Dodd-Frank Act stress testing requirement.^[2] The FDIC regulation at 12 CFR part 325 implements the company-run stress test requirements of section 165(i)(2) of the Dodd-Frank Act with respect to state nonmember banks and state savings associations with more than $10 billion in assets (covered banks). Although 12 CFR part 325 applies to all covered banks that exceed $10 billion in assets, the regulation differentiates between “$10 billion to $50 billion covered banks” and “over $50 billion covered banks.”

EGRRCPA, enacted on May 24, 2018,^[3] amended certain aspects of the company-run stress-testing requirements in section 165(i)(2) of the Dodd-Frank Act. Specifically, section 401 of EGRRCPA raises the minimum asset threshold for the company-run stress testing requirement from $10 billion to $250 billion; replaces the requirement for banks to conduct stress tests “annually” with the requirement to conduct stress tests “periodically;” and no longer requires the “adverse” stress testing scenario, thus reducing the number of required stress testing scenarios from three to two. The EGRRCPA amendments to the section 165(i)(2) stress testing requirements are effective eighteen months after enactment.

Prior to the enactment of EGRRCPA, on April 2, 2018, the FDIC issued a notice of proposed rulemaking that also proposed certain revisions to the FDIC stress testing regulations (April 2018 NPR).^[4] Certain changes proposed in the April NPR, particularly those establishing a stress testing transition process for “over $50 billion covered banks” are no longer relevant as a result of EGRRCPA's increase in the stress testing asset threshold to $250 billion. However, other revisions originally proposed in the April NPR remain necessary to ensure the FDIC's stress testing regulations remain consistent with those of the Board and the Office of the Comptroller of the Currency (OCC).

III. Proposed Rule

On December 28, 2018, the FDIC published in the Federal Register a notice of proposed rulemaking (proposed rule or proposal) to amend 12 CFR part 325 consistent with section 401 of EGRRCPA. Specifically, the proposal would have raised the applicability threshold for covered banks required to conduct stress tests from $10 billion to $250 billion, reduced the frequency by which covered banks would generally be required to conduct stress tests from annually to biennially, and eliminated the requirement that covered banks use the “adverse” scenario when conducting stress tests. The proposal also included various technical changes to facilitate the above revisions, a proposed transition period, and proposed revisions to the regulation's reservation of authority. The proposed rule also included certain provisions initially proposed in the April 2018 NPR, such as extending the as-of date range for trading and counterparty components for covered banks with significant trading activities.

The FDIC received six comments in response to the proposed rule. With respect to raising the applicability threshold from $10 to $250 billion, some commenters supported raising the threshold, others acknowledged that such a revision was statutorily required, and others expressed concern that eliminating stress testing requirements for banks under $250 billion may raise prudential concerns. Similarly, some commenters supported the proposed rule's elimination of the “adverse” scenario, positing that the adverse scenario is of limited utility,^[5] some acknowledged that removing the “adverse” scenario is statutorily required, and others expressed concern that eliminating the “adverse” scenario may reduce the efficacy of company-run stress testing. The FDIC appreciates the concerns raised by commenters, but does not believe that they warrant changes to the proposal, and is finalizing without change the proposal to align the regulatory threshold for company-run stress testing by covered banks with the statutory threshold of $250 billion established by section 401 of EGRCCPA, and to eliminate the “adverse” scenario requirement, consistent with section 401 of EGRCCPA.

With respect to the proposed rule's requirement that covered banks generally be subject to biennial stress testing, some commenters supported biennial stress testing as being an appropriate frequency for most covered banks, while others contended that reducing the frequency from annual to biennial would not be appropriate. Among the concerns highlighted by these commenters was that such a reduction in the frequency of stress testing could lead to complacency by covered banks in managing risk, and that biennial stress tests would not be sufficiently current to be credible. One commenter specifically suggested that a data-driven empirical analysis should support the change from annual to biennial stress testing, and that biennial stress testing would not be appropriate since firms make choices about dividends and repurchases on an annual basis. This commenter also suggested that the risks associated with reducing the frequency of stress testing would be amplified by other regulatory proposals addressing capital and liquidity requirements.

Based on its experience in overseeing and reviewing the results of company-run stress testing, the FDIC believes that biennial stress testing would be appropriate under most conditions for covered banks. The FDIC expects biennial stress testing to sufficiently satisfy the purposes of stress testing, including assisting in an overall assessment of a covered bank's capital adequacy, identifying risks and the potential impact of adverse financial and economic conditions on a covered bank's capital adequacy, and determining whether additional analytical techniques and exercises would be appropriate for a covered bank to employ in identifying, measuring, and monitoring risks to the soundness of the covered bank. In addition, the FDIC would continue to review the covered bank's stress testing processes and procedures. Under the final rule, all covered banks that conduct stress tests on a biennial basis are required to conduct stress tests in the same reporting year (i.e., the reporting years for biennial stress testing covered banks would be synchronized). By requiring these covered banks to conduct their stress tests in the same reporting year, the final rule allows the FDIC to make comparisons across banks for supervisory purposes and assess macroeconomic trends and risks to the banking industry. The FDIC also notes that it retains the ability to require more frequent stress testing pursuant to its reservation of authority under 12 CFR 325.1(c).

IV. Final Rule

The FDIC is adopting without change the proposed revisions to the FDIC's stress testing rule, as described in detail below.

A. Covered Banks

Section 401 of EGRRCPA amended section 165 of the Dodd-Frank Act by raising the minimum asset threshold for banks required to conduct stress tests from $10 billion to $250 billion. The final rule implements this change by eliminating the two existing subcategories of “covered bank”—“$10 to $50 billion covered bank” and “over $50 billion covered bank”—and revising the term “covered bank” to mean a state nonmember bank or state savings association with average total consolidated assets that are greater than $250 billion. In addition, the final rule makes certain technical and conforming changes to 12 CFR part 325 in order to consolidate requirements, such as those related to reporting and publication, that are currently referenced separately with respect to $10 billion to $50 billion covered banks and over $50 billion covered banks.

B. Frequency of Stress Testing

Section 401 of EGRRCPA also changed the requirement under section 165 of the Dodd-Frank Act to conduct stress tests from “annual” to “periodic.” Consistent with proposals by the Board and the OCC, the final rule provides that, in general, an FDIC-supervised institution that is a covered bank as of December 31, 2019, is required to conduct, report, and publish a stress test once every two years, beginning on January 1, 2020, and continuing every even-numbered year thereafter (i.e., 2022, 2024, 2026, etc.). The final rule also adds a new defined term, “reporting year,” to the definitions at 12 CFR 325.2. A covered bank's reporting year is the year in which a covered bank must conduct, report, and publish its stress test. As noted above, the “reporting year” for most covered banks would generally be every even-numbered year.

Certain covered banks may be required to conduct stress tests annually under the final rule. This subset of covered banks is limited to those that are consolidated under holding companies that are required to conduct stress tests more frequently than once every other year. On November 29, 2018, the Board published a proposed rule that would establish risk-based categories for determining the application of prudential standards, including stress testing.^[6] The proposed rule would distinguish between four risk-based categories for holding companies. Three of these categories—“global systemically important BHCs,” “Category II bank holding companies,” and “Category III bank holding companies”—would be required to conduct company-run stress tests. Category I holding companies and Category II holding companies would be required to conduct company-run stress tests annually, while Category III holding companies would be required to conduct company-run stress tests biennially.^[7]

Because the FDIC's final stress testing rule would require a covered institution to conduct stress tests annually if its parent holding company is required to do so under Board regulations, the FDIC's stress testing regulation would adopt by reference any potential changes to stress testing frequency in the Board's regulations, including from the Board's proposed rule. This treatment aligns with the FDIC's, OCC's, and Board's long-standing policy of applying similar standards to holding companies and their subsidiary banks, and reflects the FDIC's expectation that covered banks that would be required to stress test on an annual basis would be subsidiaries of the largest and most systemically important banking organizations, (i.e., under the Board's proposed rule, 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). There are currently no FDIC-supervised covered banks that are subsidiaries of bank holding companies that would be required to conduct annual company-run stress tests under the Board's proposed rule.

For covered banks that are required to conduct stress tests biennially or annually, the dates and deadlines in the FDIC's stress testing rule applies for each reporting year for a covered bank. For example, a biennial stress testing covered bank preparing its 2022 stress test would rely on financial data available as of December 31, 2021; use stress test scenarios that would be provided by the FDIC no later than February 15, 2022; provide its report of the stress test to the FDIC by April 5, 2022; and publish a summary of the results of its stress test in the period starting June 15 and ending July 15 of 2022.

C. Removal of “Adverse” Scenario

As enacted by the Dodd-Frank Act, section 165(i)(2)(C) required the FDIC to establish methodologies for conducting stress tests and further required the inclusion of at least three different stress-testing scenarios: “Baseline,” “adverse,” and “severely adverse.” EGRRCPA amended section 165(i) to no longer require the FDIC to include an “adverse” stress-testing scenario and to reduce the minimum number of required stress test scenarios from three to two. Given that the “adverse” stress-testing scenario has provided limited incremental information to the FDIC and market participants beyond what the “baseline” and “severely adverse” stress testing scenarios provide, the final rule removes the “adverse” scenario in the FDIC's stress testing rule and maintains the requirement to conduct stress tests under the “baseline” and “severely adverse” stress testing scenarios. The final rule also amends the definition of “severely adverse scenario” so that the term is defined relative to the “baseline scenario,” rather than relative to the “adverse scenario.”

D. Transition Process for Covered Banks

Currently, 12 CFR 325.3 provides for a transition period between when a bank becomes a covered bank and when the bank must report its first stress test. The final rule revises the transition period in 12 CFR 325.3 to conform to the other changes in this final rule. Accordingly, paragraph (a)(2) generally requires a state nonmember bank or state savings association that becomes a covered bank after December 31, 2019, to conduct its first stress test under this part in the first reporting year that begins more than three calendar quarters after the date the state nonmember bank or state savings association becomes a covered bank. For example, if a covered bank that conducts stress tests on a biennial basis becomes a covered bank on March 31 of a non-reporting year (e.g., 2023), the bank would report its first stress test in the subsequent calendar year (i.e., 2024), which is its first reporting year. If the same bank becomes a covered bank on April 1 of a non-reporting year (e.g., 2023), it would skip the subsequent reporting calendar year and the following, non-reporting calendar year, and would report its first stress test in the next reporting year (i.e., 2026). As with other aspects of the stress test rule, the rule reserves to the FDIC the authority to change the transition period for a particular covered bank, as appropriate in light of the nature and level of the activities, complexity, risks, operations, and regulatory capital of the covered bank, in addition to any other relevant factors.^[8]

The final rule does not establish a transition period for covered banks that move from a biennial stress testing requirement to an annual stress testing requirement. Accordingly, a covered bank that becomes subject to annual stress testing would be required to begin stress testing annually as of the next reporting year. The FDIC expects that covered banks would anticipate and make arrangements for this development. To the extent that particular circumstances warrant the extension of a transition period, the FDIC would do so based on its reservation of authority and supervisory discretion.

E. Review by Board of Directors

Currently, 12 CFR 325.5(b)(2) requires a covered bank's board of directors, or a committee thereof, to approve and review the policies and procedures of the stress testing processes as frequently as economic conditions or the bank's condition may warrant, but no less than annually. The final rule revises the frequency of this requirement from “annual” to “once every reporting year” in order to make review by the board of directors consistent with the covered bank's stress testing cycle.

F. Reservation of Authority

12 CFR 325.1(c) currently includes a reservation of authority, pursuant to which the FDIC may revise the frequency and methodology of the stress testing requirement as appropriate for a particular covered bank. The final rule amends the reservation of authority by clarifying the FDIC's authority to exempt a covered bank from the requirement to conduct a stress test in a particular reporting year.

G. New Range of As-of Dates for Trading Scenario Component

Under 12 CFR 325.4(c), the FDIC may require a covered bank with significant trading activities to include trading and counterparty components in its adverse and severely adverse scenarios. The trading data to be used in this component is as of a date between January 1 and March 1 of a calendar year.^[9] On February 3, 2017, the Board published a final rule that extended this range to run from October 1 of the calendar year preceding the year of the stress test to March 1 of the calendar year of the stress test.^[10] On February 23, 2018, the OCC published a final rule making the same change to its stress testing regulation.^[11] On April 2, 2018, the FDIC issued a notice of proposed rulemaking that proposed such a change, and the proposed rule re-proposed this provision.^[12] No comments were received regarding this aspect of the proposal. The final rule adopts the same change to the FDIC's stress testing regulation, extending the range of as-of dates from October 1 of the preceding calendar year to March 1 of the calendar year of the stress test. Extending the as-of date range ensures consistency with the Board and OCC rules and increases the FDIC's flexibility to choose an appropriate as-of date.

H. Other Changes

As originally proposed in the April NPR and in the proposed rule, the final rule removes certain obsolete transitional language in 12 CFR 325.3 that was included to facilitate a 2014 shift in the dates of the annual stress testing cycle.^[13] That transition is now complete and the regulatory transition language is no longer necessary.

Additionally, in order to update and standardize the language used in part 325, references to “this subpart” is changed to “this part” following the redesignation of the FDIC's stress test rule from Subpart C of 12 CFR part 325 to occupy all of part 325.^[14] Lastly, the final rule eliminates the reference to supervisory guidance in 12 CFR 325.5(b)(1).^[15]

IV. Regulatory Analysis

A. Riegle Community Development and Regulatory Improvement Act of 1994

The RCDRIA requires that the FDIC, in determining the effective date and administrative compliance requirements of new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions (IDIs), consider, consistent with principles of safety and soundness and the public interest, any administrative burdens that such regulations would place on depository institutions, including small depository institutions, and customers of depository institutions, as well as the benefits of such regulations.^[16] In addition, in order to provide an adequate transition period, new regulations that impose additional reporting, disclosures, or other new requirements on IDIs generally must take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form.

The final rule imposes no additional reporting, disclosure, or other requirements on IDIs, including small depository institutions, nor on the customers of depository institutions. The final rule reduces the frequency of company-run stress tests for a subset of banks, raises the threshold for covered banks from $10 billion to $250 billion, and reduces the number of required stress test scenarios from three to two for all covered banks. The requirement to conduct, report, and publish a company-run stress testing is a previously existing requirement imposed by section 165(i) of the Dodd-Frank Act. Accordingly, RCDRIA does not apply to the final rule.

The final rule is effective 30 days after publication in the Federal Register.

B. The Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., generally requires an agency, in connection with a final rule, to prepare and make available for public comment a final regulatory flexibility analysis that describes the impact of a final rule on small entities.^[17] However, a regulatory flexibility analysis is not required if the agency certifies that the rule would not have a significant economic impact on a substantial number of small entities. The Small Business Administration (SBA) has defined “small entities” to include banking organizations with total assets of less than or equal to $600 million that are independently owned and operated or owned by a holding company with less than $600 million in total assets.^[18] For the reasons described below and under section 605(b) of the RFA, the FDIC certifies that this proposed rule would not have a significant economic impact on a substantial number of small entities.

The FDIC has considered the potential impact of the final rule on small entities in accordance with the RFA. The FDIC supervises 3,424 depository institutions,^[19] of which, 2,665 are defined as small banking entities by the terms of the RFA.^[20] As discussed in the Background Section, 12 CFR part 325 implements company-run stress test requirements for all state nonmember banks and state savings associations with more than $10 billion in assets (covered banks). The final rule raises the threshold for covered banks required to conduct company-run stress testing from $10 billion to $250 billion. No FDIC-supervised institutions with total consolidated assets of $600 million or less are subject to 12 CFR part 325. Therefore, the final rule would not affect any small, FDIC-supervised institutions.

C. The Paperwork Reduction Act

The FDIC has determined that this final rule involves a collection of information pursuant to the provisions of the Paperwork Reduction Act of 1995 (the PRA) (44 U.S.C. 3501 et seq.).

A Federal agency may not conduct or sponsor, and an organization is not required to respond to, this information collection unless the information collection displays a currently valid Office of Management and Budget (OMB) control number. The FDIC has obtained an OMB control number for this information collection (3064-0189) and will make a submission to OMB in connection with the final rule. The FDIC did not receive any comments on its estimated total annual burden for the stress testing rule. The estimates are as follows:

Revised Information Collection Title: Stress Test Reporting Templates and Documentation for Covered Banks with Total Consolidated Assets of $250 Billion or More.

OMB Number: 3064-0189.

Form Number: FDIC DFAST 14A Summary; FDIC DFAST 14A Scenario.

Affected Public: Insured state nonmember banks

Burden Estimate:

Estimated Total Annual Burden: 1,040 hours.

D. Plain Language

Section 722 of the Gramm-Leach-Bliley Act requires the FDIC to use plain language in all proposed and final rules published after January 1, 2000. In the proposal, the FDIC requested comment on how to make this proposed rule easier to understand, and received no responsive comments.

F. The Congressional Review Act

Pursuant to the Congressional Review Act, the Office of Management and Budget's Office of Information and Regulatory Affairs designated this rule as not a “major rule,” as defined at 5 U.S.C. 804(2).

List of Subjects in 12 CFR Part 325

• Administrative practice and procedure
• Banks, banking
• Reporting and recordkeeping requirements
• State savings associations
• Stress tests

Authority and Issuance

For the reasons stated in the preamble, the FDIC amends 12 CFR part 325 as follows:

PART 325—STRESS TESTING

1. The authority citation for part 325 continues to read as follows:

Authority: 12 U.S.C. 5365(i)(2), 12 U.S.C. 5412(b)(2)(C), 12 U.S.C. 1818, 12 U.S.C. 1819(a)(Tenth), 12 U.S.C. 1831o, and 12 U.S.C. 1831p-1.

2. The heading for part 325 is revised to read as set forth above.

3. In part 325, revise all references to “subpart” to read “part”.

4. Amend § 325.1 by revising paragraphs (b) and (c) to read as follows:

4. Amend § 325.2 by:

a. Removing paragraph (a) and redesignating paragraphs (b) through (h) as paragraphs (a) through (g);

b. Revising newly redesignated paragraph (c)

c. Adding a new paragraph (h); and

d. Revising paragraphs (i), (j), and (m).

The revisions and addition read as follows:

5. Revise § 325.3 to read as follows:

6. Revise § 325.4 to read as follows:

7. Amend § 325.5 by revising paragraph (b) to read as follows:

8. Revise § 325.6 to read as follows:

9. Amend § 325.7 by revising paragraphs (a) and (b) and paragraph (c) introductory text to read as follows:

Footnotes