FHFA is proposing amendments to the stress testing rule for the entities it regulates. The proposed rule would revise the minimum threshold for the regulated entities to conduct stress tests from USD 10 billion to USD 250 billion. Additionally, the proposed rule would remove the requirements for Federal Home Loan Banks subject to stress testing and remove the adverse scenario from the list of required scenarios. These amendments align the FHFA rule with rules adopted by other financial institution regulators that implement the Dodd-Frank Act stress testing requirements, as amended by the Economic Growth, Regulatory Relief, and Consumer Protection (EGRRCP) Act. The proposed rule also makes certain conforming and technical changes. Comments must be received by January 15, 2020.
The following are the key proposed amendments to the stress testing rule:
- Minimum Asset Threshold. Section 401 of the EGRRCP Act amended section 165 of the Dodd-Frank Act by raising the minimum threshold for financial companies required to conduct stress tests from USD 10 billion to USD 250 billion. As there are no Federal Home Loan Banks with consolidated assets of over USD 250 billion, these banks will no longer be subject to the stress testing requirements of this rule. Though each of the Federal Home Loan Banks has total consolidated assets of less than USD 250 billion, the rule expressly maintains the Director's discretion to require any regulated entity with assets below the USD 250 billion threshold to conduct the stress test.
- Frequency of Stress Testing. Section 401 of the EGRRCP Act also revised the requirement under section 165 of the Dodd-Frank Act for financial companies to conduct stress tests, changing the required frequency from “annual” to “periodic.” The term periodic is not defined in EGRRCP Act. Because of the Enterprises' total consolidated asset amounts, their function in the mortgage market, the size of their retained portfolios, and their share of the mortgage securitization market, FHFA proposes to require the Enterprises to conduct stress tests on an annual basis.
- Removal of the “Adverse” Scenario. Section 401 of EGRRCP Act amended section 165(i) of the Dodd-Frank Act to no longer require the Board to include an “adverse” stress-testing scenario, reducing the number of stress test scenarios from three to two. The “baseline” scenario contains a set of conditions that affect the U.S. economy or the financial condition of the regulated entities and that reflect the consensus views of the economic and financial outlook. Additionally, the “severely adverse” scenario contains a more severe set of conditions and the most stringent of the former three scenarios. Although the “adverse” scenario has provided some additional value in limited circumstances, the “baseline” and “severely adverse” scenarios largely cover the full range of expected and stressful conditions. Therefore, FHFA does not consider it necessary, for its supervisory purposes, to require the additional burden of analyzing an “adverse” scenario.
Related Link: Federal Register Notice
Comment Due Date: January 15, 2020
Keywords: Americas, US, Banking, Stress Testing, Dodd-Frank Act, Minimum Asset Threshold, EGRRCP Act, Baseline Scenario, Severely Adverse Scenario, FHFA
Previous ArticleESAs Publish Guidelines to Establish Colleges of AML/CFT Supervisors
EBA published phase 2 of the technical package on the reporting framework 2.10, providing the technical tools and specifications for implementation of EBA reporting requirements.
FASB issued a proposed Accounting Standards Update that would grant insurance companies, adversely affected by the COVID-19 pandemic, an additional year to implement the Accounting Standards Update No. 2018-12 on targeted improvements to accounting for long-duration insurance contracts, or LDTI (Topic 944).
APRA updated the regulatory approach for loans subject to repayment deferrals amid the COVID-19 crisis.
BCBS and FSB published a report on supervisory issues associated with benchmark transition.
IAIS published a report on supervisory issues associated with benchmark transition from an insurance perspective.
ESMA updated the reporting manual on the European Single Electronic Format (ESEF).
EBA published a statement on resolution planning in light of the COVID-19 pandemic.
ECB published a guideline (2020/97), in the Official Journal of European Union, on the definition of materiality threshold for credit obligations past due for less significant institutions.
FED temporarily revised the capital assessments and stress testing reports (FR Y-14A/Q/M) to implement the changes in response to the COVID-19 pandemic.
BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework