FHFA adopted a final rule that amends the stress testing rule, in line with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection (EGRRCP) Act. The final rule, which adopts the proposed amendments without change, involves an increase in the minimum threshold for the regulated entities to conduct stress tests from USD 10 billion to USD 250 billion, removal of the requirements for Federal Home Loan Banks subject to stress testing, and removal of adverse scenario from the list of required scenarios. These amendments align the rule of FHFA with rules adopted by other financial institution regulators that implement the Dodd-Frank Act stress testing requirements, as amended by EGRRCP Act. The effective date for the final rule is March 24, 2020.
FHFA was established by the Housing and Economic Recovery Act of 2008 and is responsible for effective supervision, regulation, and housing mission oversight of Fannie Mae, Freddie Mac (the Enterprises), and the Federal Home Loan Bank System, which includes the 11 Federal Home Loan Banks (FHLBanks) and the Office of Finance. The final rule prescribes the frequency of stress testing, reduces the number of scenarios mandated for Enterprise Dodd-Frank Act stress testing, and discontinues the Dodd-Frank Act stress testing of the banks. The enterprises will continue to be covered by the rule at its new threshold; however, the banks will not. After several years of assessing the banks' stress tests, FHFA believes that the additional burden, on the banks, of conducting the annual stress tests is not necessary. FHFA retains, under its general supervisory powers, the discretion to require stress testing by the banks if FHFA determines that it would be useful. The revisions are described in more detail below:
- Minimum Asset Threshold. Section 401 of EGRRCP Act amends 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 FHFA-regulated banks with total consolidated assets of over USD 250 billion, the banks will no longer be subject to the stress testing requirements of this rule. As the total consolidated assets for each enterprise exceed the USD 250 billion threshold, the enterprises remain subject to stress testing under this rule.
- Frequency of Stress Testing. Section 401 of the EGRRCP Act 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, size of their retained portfolios, and their share of the mortgage securitization market, FHFA will continue to require the enterprises to conduct stress tests on an annual basis.
- Removal of the “Adverse” Scenario. Section 401 of EGRRCP Act amends 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. 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
Effective Date: March 24, 2020
Keywords: Americas, US, Banking, Stress Testing, Dodd-Frank Act, Minimum Asset Threshold, EGRRCP Act, Baseline Scenario, Severely Adverse Scenario, FHFA
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