Stress Test Rules: Federal Banking Agencies Publish Final Stress Test Rules on Supervisory and Company-Run Stress Test Requirements Imposed by Dodd-Frank

Sullivan & Cromwell LLP - October 26, 2012
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In October 2012, the Board of Governors of the Federal Reserve System (the “FRB”) published in the Federal Register final rules implementing the requirements of Section 165(i)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) concerning supervisory stress tests to be conducted by the FRB (the “Annual Supervisory Stress Test Rule”) and Section 165(i)(2) of Dodd-Frank regarding semi-annual company-run stress tests (the “Semi-Annual Company-Run Stress Test Rule,” and, together with the Annual Supervisory Stress Test Rule, the “Stress Test Rules”). The Stress Test Rules apply to bank holding companies (“BHCs”) with total consolidated assets of $50 billion or more (“Large BHCs”) and nonbank financial companies designated by the Financial Stability Oversight Council (“Designated SIFIs,” and together with Large BHCs, “Covered Companies”). Concurrent with the Stress Test Rules, the FRB, Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corporation (“FDIC,” and together with the FRB and OCC, the “Agencies”) published separate final rules implementing the requirements of Section 165(i)(2) of Dodd-Frank regarding annual company-run stress tests (the “Annual Company-Run Stress Test Rules”) for supervised entities (BHCs, savings and loan holding companies (“SLHCs”) and depository institutions) with average total consolidated assets greater than $10 billion other than Covered Companies (together “Covered Institutions”). The Stress Test Rules and Annual Company-Run Stress Test Rules have substantial implications for capital planning, including capital distributions.

The specific application of the rules generally depends on the type of entity involved (for example, BHC, depository institution, or SLHC), the size of the institution and its applicable regulator. In summary, the requirements of the Stress Test Rules and Annual Company-Run Stress Test Rules are as follows:

  • For BHCs:
    • Large BHCs (that is, with over $50 billion in total consolidated assets) that participated in the 2009 Supervisory Capital Assessment Program (“SCAP”) or are a successor to such a Large BHC (“SCAP BHCs”) must comply with the supervisory and company-run stress test requirements starting November 15, 2012. The annual company-run stress test must be conducted and results reported to the FRB by January 5, 2013 and the results publicly disclosed, starting with the 2012 stress test, during the period March 15 through March 31, 2013. Mid-year company-run stress tests must be completed and results reported to the FRB by July 5, 2013 and the results publicly disclosed during the period September 15 through September 30, 2013. The FRB will conduct its supervisory stress test, report a summary of the results to the SCAP BHCs and publicly disclose the summary by March 31, 2013. The timing of these disclosure requirements creates a number of difficult issues relating to the quarterly earnings statements, the potential differences between the company-run and supervisory stress test results, and “window” and “black-out” periods for trading in securities of the Large BHC and the offering of securities by the Large BHC.
    • Large BHCs that did not participate in SCAP must comply with the supervisory and company-run stress test requirements starting in the fall of 2013. The annual company-run stress test must be conducted and results reported to the FRB by January 5, 2014 and the results publicly disclosed, starting with the 2013 stress test, during the period March 15 through March 31, 2014. Mid-year stress tests must be completed and results reported to the FRB by July 5, 2014 and the results publicly disclosed during the period September 15 through September 30, 2014. The FRB will conduct its supervisory stress test, report a summary of the results to the Large BHC and publicly disclose the summary by March 31, 2014.
    • BHCs with $10 billion or more but less than $50 billion in average total consolidated assets must comply with the supervisory and company-run stress test requirements starting in the fall of 2013. The annual company-run stress test must be conducted and results reported to the FRB by March 31, 2015 and publicly disclosed, starting with the 2014 stress test, during the period June 15 through June 30, 2015.
  • For State Member Banks:
    • State banks that are members of the Federal Reserve System and are subsidiaries of SCAP BHCs must comply with the annual company-run stress test requirements starting November 15, 2012. Any other state member bank must comply with the annual company-run stress test requirements starting in the fall of 2013.
      • If the state member bank is a subsidiary of a Large BHC (regardless of whether that BHC participated in SCAP), the annual company-run stress test must be conducted and results reported to the FRB by January 5 of each year and the results publicly disclosed during the period March 15 through March 31 of each year. If the state member bank has average total consolidated assets of less than $50 billion, its initial public disclosure begins with the 2014 stress test.
      • For any other state member bank, the annual company-run stress test must be conducted and results reported to the FRB by March 31 of each year and the results publicly disclosed, starting with the 2014 stress test, during the period June 15 through June 30 of each year.
  • For National Banks, Savings Associations and State Non-member Banks:
    • National banks, savings associations and state non-member banks with average total consolidated assets of $50 billion or more must comply with the annual company-run stress test requirements immediately. The annual company-run stress test must be conducted and results reported to their primary federal regulatory agency and the FRB by January 5, 2013 and the results publicly disclosed, starting with the 2012 stress test, during the period March 15 through March 30, 2013.
    • National banks, savings associations, and state non-member banks with average total consolidated assets of $10 billion or more but less than $50 billion must comply with the annual company-run stress test requirements starting in the fall of 2013. The annual company-run stress test must be conducted and results reported to their primary federal regulatory agency and the FRB by March 31, 2014 and the results pubicly disclosed, starting with the 2014 stress test, during the period June 15 through June 30, 2015.
  • For SLHCs:
    • SLHCs with average total consolidated assets of $50 billion or more must comply with the annual company-run stress test requirements and run their first stress test in the fall of the calendar year after they first become subject to minimum capital requirements. The annual company-run stress test must be conducted and results reported to the FRB by January 5 of each year and the results disclosed during the period March 15 through March 31 of each year.
    • SLHCs with average total consolidated assets of $10 billion or more but less than $50 billion must comply with the annual company-run stress test requirements and run their first stress test in the fall of the calendar year after they first becomes subject to minimum capital requirements. The annual company-run stress test must be conducted and results reported to the FRB by March 31 of each year and the results publicly disclosed during the period June 15 through June 31 of each year.

The Semi-Annual Company-Run Stress Test Rule requires a Covered Company with a Covered Institution that is a depository institution as a subsidiary to disclose a summary of the subsidiary’s stress test results as part of the parent Covered Company’s own public disclosure. The Annual Company-Run Stress Test Rules allow these Covered Institutions generally to rely on this disclosure by their parent holding company in satisfaction of the subsidiary’s disclosure requirements. In addition, these Covered Institutions, to the extent that their reporting and disclosure requirements have been extended by the Annual Company-Run Stress Test Rules as described above, are permitted (but not required) to conduct their stress tests and report and publicly disclose results on the same timeline as their parent holding company.

The Agencies expect that the stress tests required under these rules will be only one component of the broader stress testing activities conducted by Covered Companies and Covered Institutions, including stress tests for BHCs with $50 billion or more of total consolidated assets under the FRB’s capital plan rule (the “Capital Plan Rule”). The Agencies previously highlighted the use of stress testing as a means to better understand the range of a banking organization’s potential risk exposures in joint guidance issued in 2011.