OCC released economic and financial market scenarios for use in the upcoming stress tests for covered institutions. The supervisory scenarios include baseline and severely adverse scenarios, as described in the final rule that implements stress test requirements of the Dodd-Frank Act. The covered institutions are required to complete the DFAST reporting templates using financial information as of December 31 each year. The covered institutions must publish a summary of results of the annual stress test between June 15 and July 15.
The baseline and severely adverse scenarios start in the first quarter of 2020 and extend through the first quarter of 2023. Each scenario includes 28 variables; this set of variables is the same as the set provided in the supervisory scenarios last year. This year’s global market shock for the severely adverse scenario emphasizes a heightened stress to highly leveraged markets that causes CLOs and private equity investments to experience larger market value declines relative to 2019. For DFAST 2020, banks that are completing the global market shock must incorporate a counterparty default scenario component in the severely adverse scenario. The counterparty default scenario component involves the instantaneous and unexpected default of the bank’s largest counterparty. The largest counterparty of each bank will be determined by net stressed losses.
Section 165(i)(2) of the Dodd-Frank Act requires certain financial companies, including certain national banks and federal savings associations, to conduct annual stress tests. Unless OCC determines otherwise, if the covered institution is a consolidated subsidiary of a bank holding company or savings and loan holding company subject to the supervisory stress tests conducted by FED, then within the June 15 to July 15 period such covered institution may not publish the required summary of its annual stress test earlier than the date on which FED publishes the supervisory stress test results of the covered bank's parent holding company. The objective of the annual company-run stress test is to ensure that institutions have robust, forward-looking capital planning processes that account for their unique risks and to help ensure that institutions have sufficient capital to continue operations throughout times of economic and financial stress. OCC intends to use the data to assess the reasonableness of stress test results and determine whether additional analytical techniques are needed to identify, measure, and monitor risk.
Keywords: Americas, US, Banking, Stress Testing, DFAST 14A, Reporting, Baseline Scenario, Severely Adverse Scenario, Capital Adequacy, DFAST, FED
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