Background on Dodd-Frank Act Stress Testing
In the wake of the financial crisis, Congress enacted the Dodd-Frank Act,10 which, among other provisions, requires the Federal Reserve to conduct an annual supervisory stress test. The Dodd-Frank Act also requires the same firms that are subject to the supervisory stress test to conduct their own stress tests and report the results to the Federal Reserve twice a year (company-run stress test).11 LISCC firms are subject to Dodd-Frank Act supervisory stress testing, as are large and complex firms12 and large and noncomplex firms.13
In conducting the supervisory stress tests, the Federal Reserve projects balance sheets, RWAs, net income, and resulting post-stress capital levels and regulatory capital ratios over a nine-quarter "planning horizon," generally using a set of capital action assumptions prescribed in the Dodd-Frank Act stress test rules (see Capital Action Assumptions and Regulatory Capital Ratios). The projections are based on three macroeconomic scenarios required by the Dodd-Frank Act (baseline, adverse, and severely adverse) and developed annually by the Federal Reserve.14 For the annual company-run stress test, the BHCs use the same planning horizon, capital action assumptions, and scenarios15 as those used in the supervisory stress test.16 The use of common capital action assumptions and scenarios enhances the comparability of the supervisory and company-run results.
Together, the Dodd-Frank Act supervisory stress tests and the company-run stress tests are intended to provide company management and boards of directors, the public, and supervisors with forward-looking information to help gauge the potential effect of stressful conditions on the ability of these large banking organizations to absorb losses, while meeting obligations to creditors and other counterparties and continuing to lend. The Dodd-Frank Act requires each BHC to disclose a summary of its company-run stress test results and also requires the Federal Reserve to disclose a summary of its supervisory stress test results.17 The Federal Reserve must publicly disclose supervisory stress test results by June 30 of the calendar year in which the stress test was conducted, and each BHC must disclose a summary of its company-run stress test within the 15 calendar days following.18
References
10. Pub. L. No. 111-203, 124 Stat. 1376 (2010). Return to text
11. Under the Dodd-Frank Act, all financial companies with more than $10 billion in total consolidated assets that are supervised by a primary federal financial regulatory agency are required to conduct an annual company-run stress test. However, only covered companies, defined as BHCs, U.S. IHCs, or nonbank financial companies with average total consolidated assets of $50 billion or more, are subject to the additional mid-cycle stress test and the supervisory stress test. See 12 USC 5365(i)(2) and 12 CFR 252.52(g). Return to text
12. The LISCC or large and complex firms required to participate in DFAST 2017 are Bank of America Corporation; The Bank of New York Mellon Corporation; Capital One Financial Corporation; Citigroup Inc.; The Goldman Sachs Group, Inc.; HSBC North America Holdings Inc.; JPMorgan Chase & Co.; Morgan Stanley; The PNC Financial Services Group, Inc.; State Street Corporation; TD Group US Holdings LLC; U.S. Bancorp; and Wells Fargo & Company. Return to text
13. The large and noncomplex firms participating in DFAST 2017 are Ally Financial Inc.; American Express Company; BancWest Corporation; BB&T Corporation; BBVA Compass Bancshares, Inc.; BMO Financial Corp.; CIT Group Inc.; Citizens Financial Group, Inc.; Comerica Incorporated; Discover Financial Services; Fifth Third Bancorp; Huntington Bancshares Incorporated; KeyCorp; M&T Bank Corporation; MUFG Americas Holdings Corporation; Northern Trust Corporation; Regions Financial Corporation; Santander Holdings USA, Inc.; SunTrust Banks, Inc.; and Zions Bancorporation. Return to text
14. The Board has issued a policy statement regarding its process for designing the scenarios. See Policy Statement on the Scenario Design Framework for Stress Testing, 78 Fed. Reg. 71,435 (November 29, 2013), www.gpo.gov/fdsys/pkg/FR-2013-11-29/pdf/2013-27009.pdf (12 CFR part 252, appendix A). Return to text
15. Under the stress test rules, the Federal Reserve was required to provide the scenarios to companies no later than February 15, 2017, for DFAST 2017. See 12 CFR 252.54(b)(1). Return to text
16. See 12 CFR 252.54. Return to text
17. 12 USC 5365(i)(1)(B)(v) and 5365(i)(2)(C)(iv). Return to text
18. See 12 CFR 252.46(b) and 12 CFR 252.58(a)(i). Return to text