[Federal Register Volume 77, Number 221 (Thursday, November 15, 2012)]
[Rules and Regulations]
[Pages 68047-68050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27660]



 ========================================================================
 Rules and Regulations
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
 to and codified in the Code of Federal Regulations, which is published 
 under 50 titles pursuant to 44 U.S.C. 1510.
 
 The Code of Federal Regulations is sold by the Superintendent of Documents. 
 Prices of new books are listed in the first FEDERAL REGISTER issue of each 
 week.
 
 ========================================================================
 

  Federal Register / Vol. 77, No. 221 / Thursday, November 15, 2012 / 
Rules and Regulations  

[[Page 68047]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 46

[Docket No. OCC-2012-0016]


Policy Statement on the Principles for Development and 
Distribution of Annual Stress Test Scenarios

AGENCY: Office of the Comptroller of the Currency (OCC), Treasury.

ACTION: Interim guidance with request for public comment.

-----------------------------------------------------------------------

SUMMARY: This interim guidance sets forth the general processes and 
factors to be used by the OCC in development and distributing the 
stress test scenarios for the annual stress test required by the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010 as 
implemented by the Annual Stress Test final rule (Stress Test Rule) 
published on October 9, 2012. Under the Stress Test Rule national banks 
and Federal savings associations with total consolidated assets of more 
than $10 billion (covered institutions) are required to conduct annual 
stress tests using a minimum of three scenarios (baseline, adverse and 
severely adverse) provided by the OCC. The Stress Test Rule specified 
that the OCC will provide the required scenarios to the covered 
institutions by November 15th of each year.

DATES: This interim guidance is effective November 15, 2012. Comments 
must be submitted on or before January 14, 2013.

ADDRESSES: Because paper mail in the Washington, DC area and at the OCC 
is subject to delay, commenters are encouraged to submit comments by 
email if possible. Please use the title ``Policy Statement on 
Principles for Development and Distribution of Annual Stress Test 
Scenarios'' to facilitate the organization and distribution of the 
comments. You may submit comments by any of the following methods:
     Email: [email protected].
     Mail: Office of the Comptroller of the Currency, 250 E 
Street SW., Mail Stop 2-3, Washington, DC 20219.
     Fax: (202) 874-5274.
     Hand Delivery/Courier: 250 E Street SW., Mail Stop 2-3, 
Washington, DC 20219.
     Instructions: You must include ``OCC'' as the agency name 
and ``Docket Number OCC-2012-0016'' in your comment. In general, OCC 
will enter all comments received into the docket and publish them on 
the Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this notice by any of the following methods:
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 250 E Street SW., Washington, DC 
20219. For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to security 
screening in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.

FOR FURTHER INFORMATION CONTACT: David Nebhut, Deputy Comptroller for 
Economic and Policy Analysis, Economic and Policy Analysis (202) 649-
5472, Arthur McMahon, Director, International Analysis and Banking 
Conditions (202) 649-5475, Robert Scavotto, Lead International Expert, 
International Analysis and Banking Condition (202) 649-5477, Henry 
Barkhausen, Attorney, Legislative and Regulatory Activities Division 
(202) 874-5090, or Ron Shimabukuro, Senior Counsel, Legislative and 
Regulatory Activities Division (202) 874-5090, Office of the 
Comptroller of the Currency, 250 E Street SW., Washington, DC 20219.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 requires certain financial companies, including 
national banks and Federal savings associations with total consolidated 
assets of more than $10 billion (covered institutions), to conduct 
annual stress tests. The OCC published in the Federal Register on 
October 9, 2012, the final Annual Stress Test rule \1\ implementing the 
requirements and setting out definitions and rules for scope of 
application, scenarios, reporting, and disclosure. Under the Stress 
Test Rule, covered institutions are required to conduct annual stress 
tests based on the annual stress test cycle set out in Table 1.
---------------------------------------------------------------------------

    \1\ 77 FR 61238 (October 9, 2012).

   Table 1--Process Overview of Annual Stress Test Cycles for Covered
                              Institutions
------------------------------------------------------------------------
            Key step               Over $50 billion   $10 to $50 billion
------------------------------------------------------------------------
1. OCC distributes scenarios for  By November 15....  By November 15.
 annual stress tests.

[[Page 68048]]

 
2. Covered institutions conduct   By January 5......  By March 31.
 annual stress test and submit
 Annual Stress Test Report to
 the OCC and the Board.
3. Covered institutions make      Between March 15    Between June 15
 required public disclosures.      and March 31.       and June 30.
------------------------------------------------------------------------

    A key component of the annual stress test is the stress test 
scenarios. Scenarios are sets of conditions that affect the U.S. 
economy or the financial condition of covered institutions. Each 
scenario includes the values of the variables specified for each 
quarter over the stress test horizon. The variables specified for each 
scenario generally address economic activity, asset prices, and other 
measures of financial market conditions for the United States and key 
foreign countries. The OCC annually will determine scenarios that are 
appropriate for use for each annual stress test. The timeline in Table 
1 provides that the OCC will distribute stress test scenarios to 
covered institutions by November 15th of each year. This document 
articulates the principles that the OCC will apply to develop and 
distribute those scenarios for covered institutions.

II. Immediate Effective Date and Request for Comment

    This interim guidance is effective November 15, 2012 and 
applicable, to the extent practicable, to the annual stress test cycle 
beginning this year. As explained in the preamble, the Stress Test Rule 
was effective immediately upon publication because the stress testing 
framework represents a critical tool for national bank supervision and 
is essential for the health of covered institutions and the overall 
financial stability of the economy.\2\ For this reason, OCC believed 
that it was necessary for certain national banks and Federal savings 
associations with consolidated assets of $50 billion or more to conduct 
stress tests under the Stress Test Rule this year.
---------------------------------------------------------------------------

    \2\ See Id. at 61244.
---------------------------------------------------------------------------

    The stress tests conducted under the Stress Test Rule framework 
will provide important forward-looking information to supervisors to 
assist in the overall assessment of a covered institution's capital 
adequacy and will help determine whether additional analytical 
techniques and exercises are appropriate to identify, measure and 
monitor risk to the financial soundness of the covered institution. 
Moreover, the OCC believes that the stress tests will benefit the 
covered institutions by supporting their own forward-looking 
assessments of their risks and better equip them to address a range of 
adverse outcomes. Similarly, the OCC believes that it is necessary to 
make this interim guidance effective immediately. The OCC recognizes 
that because of timing issues many of the procedural aspects of this 
interim guidance will not be relevant for the development of the 
scenarios for this year, however, the OCC believes that it is important 
to give covered institutions a sense of the general processes and 
factors used for scenario development that the OCC expects to use going 
forward, as well as an opportunity to comment.
    The agency solicits comment on all aspects of the interim guidance. 
Specifically, what challenges, if any, exist in applying this guidance 
generally or at particular banking organizations and why? Are there any 
terms described by the interim guidance that require further 
clarification and how should they be defined?

III. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320, Appendix A1, the OCC reviewed the interim 
guidance. The OCC may not conduct or sponsor, and an organization is 
not required to respond to, an information collection unless the 
information collection displays a currently valid OMB control number. 
The interim guidance contains no new collections of information under 
the PRA beyond those contained in OMB Control No. 1557-0311, the 
collection covering the Annual Stress Test rulemaking.

IV. Principles for Development and Distribution of Annual Stress Test 
Scenarios

    The text of the proposed guidance is as follows.

PRINCIPLES FOR DEVELOPMENT AND DISTRIBUTION OF STRESS TEST SCENARIOS

I. INTRODUCTION

    Section 165(i)(2) of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 requires certain financial 
companies, including national banks and Federal savings associations 
with total consolidated assets of more than $10 billion (covered 
institutions), to conduct annual stress tests. The Office of the 
Comptroller of the Currency (OCC) published in the Federal Register 
on October 9, 2012, a final rule (stress test rule) implementing the 
requirements and setting out definitions and rules for scope of 
application, scenarios, reporting, and disclosure.\1\ Under the 
stress test rule, each year the OCC will distribute stress test 
scenarios to covered institutions. This document articulates the 
principles that the OCC will apply to develop and distribute those 
scenarios for covered institutions.
---------------------------------------------------------------------------

    \1\ Annual Stress Test, 77 FR 61238 (October 9, 2012).
---------------------------------------------------------------------------

II. STRESS TESTS

    As defined by the stress test rule, a stress test is ``a process 
to assess the potential impact of stressful scenarios on the 
consolidated earnings, losses, and capital of a covered institution 
over the planning horizon, taking into account the covered 
institution's current condition, risks, exposures, strategies, and 
activities.'' \2\
---------------------------------------------------------------------------

    \2\ 12 CFR 46.2 (Definition of Stress Test).
---------------------------------------------------------------------------

    Stress tests help covered institutions and the OCC determine 
whether those institutions have capital sufficient to absorb losses 
that could result from adverse economic conditions. The OCC views 
stress test results as one source of forward-looking information 
that can help identify downside risks and assess the potential 
impact of adverse outcomes on capital adequacy. Stress tests are not 
the only tool the OCC uses for these purposes; a complete assessment 
of a covered institution's capital position typically includes 
review of its capital planning processes, the governance concerning 
those processes, and the adequacy of capital under established 
regulatory capital measures. The OCC expects the board of directors 
and senior management of each covered institution to consider the 
results of the annual stress test when conducting capital planning, 
assessing capital adequacy, and evaluating risk management 
practices. The OCC also may use stress test results to determine 
whether additional analytical techniques and exercises are 
appropriate for a covered institution to employ in identifying, 
measuring, and monitoring risks to the financial soundness of the 
covered institution.
    Under the final rule, each covered institution is required to 
conduct an annual stress test using its financial data as of 
September 30 of each year, unless the OCC requires a different ``as 
of'' date for any or all categories of financial data. The stress 
test

[[Page 68049]]

must assess the potential impact of specific scenarios on the 
regulatory capital of the covered institution and on certain related 
items over a forward-looking planning horizon, taking into account 
all relevant exposures and activities.\3\ Under the final rule, the 
planning horizon is at least nine quarters, consisting of the fourth 
quarter of the current calendar year plus all four quarters of each 
of the two subsequent calendar years.
---------------------------------------------------------------------------

    \3\ Id. at 46.6(a).
---------------------------------------------------------------------------

III. SCENARIOS

    Scenarios are sets of conditions that affect the U.S. economy or 
the financial condition of covered institutions.\4\ The OCC annually 
will determine scenarios that are appropriate for use under the 
stress test rule. In conducting the stress test under the stress 
test rule, each covered institution must use the scenarios provided 
by the OCC.
---------------------------------------------------------------------------

    \4\ Id. at 46.2 (Definition of scenarios).
---------------------------------------------------------------------------

    Each scenario includes the values of the variables specified for 
each quarter over the stress test horizon. The OCC expects that 
covered institutions may not need to use all of the variables 
provided and may need to estimate relationships to identify other 
variables, such as those reflecting local economic conditions, from 
the values the OCC provides. The OCC will review the appropriateness 
of estimation processes and resulting estimates, or other 
modifications of variables, through its ongoing supervisory 
processes.
    The variables specified for each scenario generally address 
economic activity, asset prices, and other measures of financial 
market conditions for the United States and key foreign countries. 
Variables that describe economic activity likely will include, but 
not be limited to, the growth rate of gross domestic product, the 
unemployment rate, and the inflation rate. The OCC anticipates that 
the path (which reflects the level and rate of change) of the 
unemployment rate during the planning horizon in particular will be 
a key variable indicating the severity of economic stress, as this 
variable provides a simple and widely noted gauge of the state of 
the U.S. economy. This point is discussed further in this statement 
in connection with severely adverse scenarios.
    Other variables may represent asset prices and financial market 
conditions, including interest rates. The OCC expects to specify 
scenarios using a fairly stable core set of variables, although 
variables may be added or deleted as the U.S. and global economic 
environment evolves. The OCC will attempt to minimize additions, 
redefinitions, or re-specifications from year to year, recognizing 
that the use of new or modified variables for stress tests may 
require potentially costly systems changes at covered institutions.
    The scenarios provided by the OCC reflect at least three sets of 
economic and financial conditions, described in the rule as 
baseline, adverse, and severely adverse. The baseline broadly 
corresponds to the set of conditions expected to prevail over the 
term of the stress tests. The adverse and severely adverse scenarios 
introduce hypothetical stress conditions intended to test the safety 
and soundness of covered institutions as well as their capital 
planning processes. The aim is to assess the covered institutions' 
ability to identify and measure the risks it faces under adverse 
conditions, and to ensure that appropriate amounts of capital exist 
to support those risks. The OCC will evaluate both the adequacy of 
the projections and the processes used in the company-run stress 
test. The OCC expects covered institutions to be able to maintain 
ready access to funding, continue operations, meet obligations to 
creditors and counterparties, and continue to serve as credit 
intermediaries under conditions that are significantly more adverse 
than expected.
    The baseline scenario establishes a benchmark set of conditions 
that incorporates the most current views on the macroeconomic 
outlook. These views are based on information obtained from 
government agencies, other public sector organizations, and private 
sector forecasters as close to the date of the annual stress test as 
possible. The baseline may be based on one or more of the 
``consensus'' forecasts produced by various organizations, although 
the OCC may choose to depart from the consensus if necessary to 
provide a more appropriate baseline for the stress tests.
    The adverse scenario is a hypothetical set of conditions 
designed to simulate a moderate level of stress that covered 
companies could experience, such as a mild-to-moderate U.S. 
recession. The adverse scenario may also be used to investigate 
other risks, perhaps including operational risks, that the OCC 
believes should be better understood or more closely monitored.
    The severely adverse scenario is a set of quite challenging 
economic and financial conditions, such as those that might be 
experienced in a relatively severe recession. Three examples of 
severe recessions from recent U.S. experience may illustrate the 
anticipated depth of the severely adverse scenario as it relates to 
the unemployment rate:
     The 1973-75 recession, during which the unemployment 
rate increased 4.1 percentage points, from 4.9 percent in 1973Q3 to 
9.0 percent in 1975Q2 (one quarter after the recession ended).
     The back-to-back recessions in 1980 and 1981-82, during 
which the unemployment rate increased 4.7 percentage points, from 
6.1 percent in 1979Q4 to 10.8 percent in 1982Q4 (the last quarter of 
the recession).
     The 2007-09 recession, during which the unemployment 
rate increased 5.3 percentage points, from 4.7 percent in 2007Q3 to 
10.0 percent in 2009Q4 (two quarters after the recession ended).
    Other variables under the adverse and severely adverse scenarios 
would be expected to follow paths consistent with the depth and 
duration of previous recessions and with models of macroeconomic 
activity. The severely adverse scenario also may reflect other risks 
that are especially salient and that might not be captured by past 
recessions, including elevated levels of systemic risk.
    The scenarios distributed by the OCC for the stress tests cover 
at least nine quarters. In addition, the OCC will generally publish 
scenarios that cover one year beyond the planning horizon of the 
stress test, to allow for the estimation of loan losses for the year 
following the stress planning horizon; this additional specification 
allows covered institutions to determine adequate levels of loan 
loss reserves.
    The OCC believes that as a general matter all covered 
institutions should use the same set of scenarios and planning 
horizon so that the OCC can better compare results across 
institutions. To that end, the OCC intends to provide one set of 
scenarios for use by all covered institutions. However, the OCC 
believes there may be circumstances that would warrant the use of 
different or additional scenarios or a planning horizon of more than 
nine quarters. Thus, under the stress test rule the OCC reserves the 
authority to require a covered institution to use different or 
additional scenarios and/or planning horizons the agency may deem 
appropriate. For example, a covered institution may conduct business 
activities or have risk exposures that would encounter stress under 
conditions that differ materially from those that would generate 
stress for other institutions. The OCC expects such situations to be 
rare and anticipates making every effort to distribute the same 
scenarios to all covered institutions.
    In addition to the minimum three scenarios, the OCC may require 
a covered institution with significant trading activities to include 
factors related to trading and counterparty risk in its stress test. 
Typically, these factors might include additional shocks to specific 
market prices, interest rates, rate spreads, or other key market 
variables consistent with historical or hypothetical adverse market 
events.

IV. DEVELOPMENT AND DISTRIBUTION

    As one part of the process of developing scenarios, the OCC will 
gather information from outside entities and develop themes for the 
stress test scenarios, including the identification of potentially 
material vulnerabilities or salient risks to the financial system, 
and consider potential paths for individual variables. The outside 
entities may include academic experts, staffs of international 
organizations, foreign supervisors, financial institutions that 
regularly provide forecasts, and other private sector risk analysts 
that regularly conduct stress tests based on U.S. and global 
economic and financial scenarios. The OCC will use the information 
gathered in this manner to inform its consideration of potential 
risks and scenarios.
    The OCC, the Board of Governors of the Federal Reserve System 
(Board), and the Federal Deposit Insurance Corporation (FDIC) 
(Agencies) expect to consult closely to develop scenarios for stress 
testing. Absent specific supervisory concerns, the OCC anticipates 
that the annual stress test scenarios distributed by the OCC will be 
the same as or nearly identical to the scenarios developed by the 
Board for the supervisory stress tests conducted by the Board under 
Section 165(i)(1). This would mean the same economic and financial 
variables following the same paths as used in the scenarios for the 
Board's supervisory stress tests.

[[Page 68050]]

    Although the Agencies generally expect to consult closely on 
scenario development, they may have different views of risks that 
should be reflected in the stress test scenarios used by covered 
institutions for the annual stress test. The OCC may distribute 
scenarios to covered institutions that differ in certain respects 
from those distributed by the FDIC and the Board if necessary to 
better reflect specific OCC concerns. The OCC expects such 
situations to be extremely rare, however, and anticipates making 
every effort to avoid differences in the scenarios required by each 
agency.
    The OCC anticipates that the stress test scenarios will be 
revised annually as appropriate to ensure that each scenario remains 
relevant under prevailing economic and industry conditions. These 
yearly revisions will enable the scenarios to capture evolving risks 
and vulnerabilities. The need to ensure that scenarios do not become 
outdated because of economic and financial developments makes a 
lengthy process of review and comment concerning scenarios prior to 
distribution each year impractical. However, the process of 
consultation with the Board and the FDIC, as well as the ongoing 
interaction of OCC staff with public and private sector experts to 
obtain views on salient risks and to obtain suggestions for the 
behavior of key economic variables, should ensure that the stress 
conditions reflected in the scenarios are well suited to their 
purpose.
    The scenario development process culminates with the 
distribution of the scenarios to all covered institutions no later 
than November 15 of each year. The scenario descriptions provided to 
covered institutions will include values for economic and financial 
variables depicting the paths those variables follow under the 
scenarios. The OCC believes that distribution of the scenarios by 
November 15 aligns with similar processes at the FDIC and the Board.

    Dated: November 6, 2012.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2012-27660 Filed 11-14-12; 8:45 am]
BILLING CODE 4810-33-P