On October 9, the federal banking agencies announced adoption of final rules1 implementing a requirement in the Dodd-Frank Act2 that banking organizations, including savings and loan holding companies3, with total consolidated assets of more than $10 billion but less than $50 billion4, conduct annual stress tests, report the results to their principle federal regulator and the Federal Reserve Board, and publish a summary of the results. Because many banking organizations subject to these rules have not previously participated in agency-mandated stress testing programs5  and thus will need time to build systems, implementation of these rules will be delayed. A $10 billion to $50 billion banking organization must conduct its first stress test under the regulations using financial statement data as of September 30, 2013 and report the results by March 31, 2014. The publication requirement for such firms will first apply to the 2014 stress test using data as of September 30, 2014, results of which would not be disclosed until June 15- 30, 20156. However, a bank that is part of a holding company with $50 billion or more in total consolidated assets may choose to follow a stricter time schedule if it chooses to do so.

The new rules define the term “stress test,” establish methodologies to conduct stress tests with at least three sets of conditions (baseline7, adverse8, and severely adverse9), establish the form of report to be submitted, and require publication of a summary of results.


Stress testing is merely a process to assess the potential impact of different scenarios on a banking organization’s earnings, losses, and capital over a fixed period of time considering the organization’s condition, risks, exposures, strategies, and activities.

Stress tests provide the regulators forward-looking information to assist in their overall assessment of a bank’s capital adequacy and in identifying downside risks and the potential impact of adverse outcomes. Stress tests also should help a banking organization with its internal capital planning. Earlier this year, the agencies issued formal guidance on stress testing for banking organizations with more than $10 billion in total consolidated assets,10 which explains how broader stress testing activities should address the impact of potential adverse outcomes of various risks and may affect aspects of a bank’s financial condition beyond capital adequacy.

Where a bank with more than $10 billion in assets is part of a shell holding company, the bank’s principal regulator and the Federal Reserve Board, as regulator of the holding company, will coordinate efforts and communicate with both the bank and the holding company on how to address stress testing requirements while avoiding duplication.

Agency Coordination

The agencies have coordinated with one another to achieve consistency and comparability of stress test results in the areas of scope of application, scenarios, data collection, reporting, and disclosure.

The agencies also will coordinate on the development of scenarios and will seek comment on the procedures to be used to do so.

Scenario Development  

Normally, the banking organization would conduct an annual stress test using its financial data as of September 30 of that year. The stress test is to assess the potential impact of different scenarios on capital and related items over a nine-quarter planning horizon.

The agencies will distribute at least three economic scenarios (baseline, adverse, and severely adverse) to all covered banks by November 15 each year. Each scenario will include the paths of a number of economic variables, such as real Gross Domestic Product, the unemployment rate, and equity and property prices; each banking organization may use all or a subset of the variables and may even extrapolate other variables, such as local economic variables, from the paths of the economic variables provided by regulators.

Banking organizations with $50 billion or more in total consolidated assets will have seven weeks to report the results of the annual stress test, but smaller banking organizations with more than $10 billion in consolidated assets will have until March 31, 2014 to do so.  

The agencies will also coordinate on the development of scenarios and seek comment on the procedures to be used to do so. To ensure comparability, the agencies will not permit banks to use their own internally generated scenarios, but will normally require all covered banks to use the same scenarios.

Stress Test Methodologies and Practices

Each covered banking organization will be required to calculate for each of the nine-quarter quarter ends: (1) estimates of losses, (2) pre-provision net revenues, (3) net income, and (4) provision for loan and lease losses, resulting from the conditions specified in each scenario, as well as the potential impact on (5) capital levels and (6) capital ratios, taking into account the payment of dividends, planned capital infusions, and any other expected capital actions.

Each banking organization is to adopt policies and procedures that outline its stress testing practices and methodologies, as well as processes for validating and updating those practices. The board of directors or one of its committees must review and approve these policies and procedures at least annually, and the board and senior management is to receive a summary of the annual stress test results. The board and senior management are to consider the stress test results in the normal course of business, including, but not limited to, capital planning, assessment of capital adequacy, and risk management practices.

The Federal Reserve Board plans to issue supervisory guidance to banking organizations with more than $10 billion in assets, providing more detail describing supervisory expectations for company-run stress tests.


The covered banking organization is to report stress test results to both its primary federal regulator and to the Federal Reserve Board by March 31, 2014 if its total consolidated assets exceed $10 billion, but are less than $50 billion. If its total consolidated assets are $50 billion or more, the report is due by January 5, 2013.

The information to be reported includes (1) a description of the types of risks included in the severely adverse scenario stress test; (2) a summary of methodologies used; (3) estimates of (a) aggregate losses, (b) pre-provision net income, (c) net income, (d) provision for loan and lease losses, and (e) capital ratios; and (4) an explanation of the most significant causes for changes in regulatory capital ratios (e.g. the amount of losses attributable to a particular portfolio).

The agencies have proposed reporting templates for banking organizations with $50 billion or more in consolidated assets, but will propose more simplified separate reporting templates for smaller banking organizations with more than $10 billion in assets.  

The FDIC and Federal Reserve Board rules provide that the confidentiality of the reports will be governed by the Freedom of Information Act. However, the OCC rule provides that reports are non-public information and property of the OCC, unauthorized disclosure of which is generally prohibited. A banking organization will file its report with both its primary federal regulator and the Federal Reserve Board, and thus, it is theoretically possible that the confidentiality of the reports could be different for different banking organizations and even be different for the same banking organization between its primary federal regulator and the Board.

The regulators will analyze the quality of each covered banking organization’s stress test processes and results and provide feedback during the supervisory process.

The agencies vary in their estimates of the average number of hours required by institutions to prepare the annual report, with the FDIC estimating 1,040, but the Federal Reserve Board estimating only 80 hours after initial setup. The OCC determined that its final rule will not result in expenditures by the private sector of more than $100 million in one year.  

Public Disclosure of Stress Test Results

Normally, a banking organization would be required to publish the summary of stress test results on its website.

The information to be disclosed closely tracks the information to be reported to the agencies.  

In adopting the final regulations, the banking agencies removed a proposed requirement that covered banking organizations publicly disclose stress test results under baseline and adverse scenarios. However, any such public disclosures could have been considered long-term earnings forecasts and created securities law problems for the disclosing banking organizations, and so, the agencies dropped that aspect of the proposal.

A covered bank that is a consolidated subsidiary of a holding company may publish abbreviated disclosures (a summary of changes in capital ratios with an explanation of the most significant causes) with the parent’s disclosures and on the same timeline as the parent.