FED and OCC Release Stress Test Scenarios for 2023

FED has published the baseline and severely adverse scenarios, which are hypothetical in nature and start in the first quarter of 2023 and extend through the first quarter of 2026. The stress tests will evaluate the financial resilience of large banks by estimating bank losses, revenues, expenses, and resulting capital levels—which provide a cushion against losses—under hypothetical recession scenarios into the future. Additionally, banks with large trading operations will be tested against a global market shock component that stresses their trading, private equity, and certain other fair-valued positions. Banks with substantial trading or custodial operations will be tested against the default of their largest counterparty. This year, for the first time, FED is publishing an additional, exploratory market shock component that will be applied only to the eight U.S. global systemically important banks (G-SIBs). The purpose of the stress test is to understand a firm’s resilience to a range of severe but plausible events, and the exploratory component furthers that purpose by posing a different set of risks than is probed in this year’s global market shock component. The exploratory market shock will not contribute to the capital requirements to be set by the stress test this year. FED has also published scenario data in Excel and CSV formats as well as the list of banks with the components of the test that apply to each bank, based on data as of the third quarter of 2022.

Concurrently, OCC has released its 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 OCC rule that implements the stress testing requirements of the Dodd-Frank Act. OCC is expected to provide the required scenarios to the covered institutions by February 15 of each year while the covered institutions are required to submit the results of their company-run stress tests to OCC by April 5 and publish those results between June 15 and July 15. The stress testing rule (12 CFR 46.5) requires a covered institution to conduct a stress test every other year, on even-numbered years, unless it is consolidated under a holding company that is required by FED to conduct an annual company-run stress test. This is why the Category III covered institutions will not be subject to the stress tests this year. OCC is also seeking comments, until March 13, 2023, on the proposed, but not yet finalized, the Dodd-Frank Act Stress Testing (DFAST) reporting templates and instructions. Overall, these reporting templates collect quantitative projections of balance sheet, capital, losses, and income across several macroeconomic scenarios, along with qualitative information on methodologies. The DFAST-14A report is comprised of a Summary, Scenario, Regulatory Capital Instruments, Operational Risk, and a Current Expected Credit Loss (CECL) supplemental schedule, each with multiple supporting sub-schedules. 

Related Links

• FED News Release
• FED Scenarios and Scenario Data
• OCC News Release
• OCC Scenarios (ZIP)
• Federal Register Notice on DFAST
• DFAST Templates