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    FED Publishes Notices Related to Stress Testing and Pillar 2 Guidance

    June 09, 2021

    FED announced plans to begin winding down the portfolio of the Secondary Market Corporate Credit Facility, which is a temporary emergency lending facility that closed on December 31, 2020. In addition, FED published two notices in the Federal Register on the recordkeeping provisions associated with stress testing guidance (FR 4202) and on the Basel II Interagency Pillar 2 Supervisory Guidance (FR 4199).

    The following are the key highlights of the updates from FED:

    • FED is adopting a proposal to extend for three years, without revision, the recordkeeping provisions associated with Stress Testing Guidance (FR 4202). The Stress Testing Guidance recommends that banking organizations have a stress testing framework that includes clearly defined objectives, well-designed scenarios tailored to the banking organization's business and risks, well-documented assumptions, conceptually sound methodologies to assess potential impact on the banking organization's financial condition, informative management reports, and recommended actions based on stress test results. The Guidance also recommends organizations to have policies and procedures for a stress testing framework. FED has extended the FR 4202 without revision to ensure compliance with the Paperwork Reduction Act. However, whether and to what extent changes should be made to the guidance, in light of recent amendments made by FED to its stress testing rules, is under consideration. FED will publish any proposed changes to the FR 4202 via a separate notice for comment. 
    • FED is seeking comments on a proposal to extend for three years, without revision, the Basel II Interagency Pillar 2 Supervisory Guidance (FR 4199). The Pillar 2 Guidance is intended to assist banking organizations that are subject to the Basel II advanced approaches capital adequacy framework in applying that framework. Advanced approaches banking organizations are required to use an internal ratings-based approach to calculate regulatory credit risk capital requirements and advanced measurement approaches to calculate regulatory operational risk capital requirements. Banking organizations are required to meet certain qualification requirements before they can use the advanced approaches framework for risk-based capital purposes. The Pillar 2 Guidance sets the expectation that such organizations maintain certain documentation as described in certain parts of the guidance. FED consulted with FDIC and OCC and confirmed that there will be no revisions to the guidance and no revision to the time per response estimates. Comments must be submitted by August 09, 2021.
    • FED announced plans to begin winding down the portfolio of the Secondary Market Corporate Credit Facility (SMCCF), which is a temporary emergency lending facility that closed on December 31, 2020. The SMCCF proved vital in restoring market functioning last year, supporting the availability of credit for large employers and bolstering employment through the COVID-19 pandemic. SMCCF portfolio sales will be gradual and orderly and will aim to minimize the potential for any adverse impact on market functioning by taking into account daily liquidity and trading conditions for exchange traded funds and corporate bonds. The Federal Reserve Bank of New York, which manages the operations of the SMCCF, will announce additional details soon and before sales begin. The SMCCF was established with the approval of the Treasury Secretary and equity provided by the Treasury Department under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act.

     

    Related Links

    Comment Due Date: August 09, 2021

    Keywords: Americas, US, Banking, FR 4202, FR4199, Stress Testing, Reporting, Regulatory Capital, COVID-19, SMCCF, Credit Risk, Lending Facility, Pillar 2, Basel, FED

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