[Federal Register Volume 85, Number 57 (Tuesday, March 24, 2020)]
[Rules and Regulations]
[Pages 16528-16531]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-05476]


=======================================================================
-----------------------------------------------------------------------

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1238

RIN 2590-AB05


Stress Testing of Regulated Entities

AGENCY: Federal Housing Finance Agency.

ACTION: Final rule.

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

SUMMARY: The Federal Housing Finance Agency (FHFA) is adopting a final 
rule that amends its stress testing rule, consistent with section 401 
of the Economic Growth, Regulatory Relief, and Consumer Protection Act 
(EGRRCPA). These amendments adopt the proposed amendments without 
change to modify the minimum threshold for the regulated entities to 
conduct stress tests increased from $10 billion to $250 billion; 
removal of the requirements for Federal Home Loan Banks (Banks) subject 
to stress testing; and removal of the adverse scenario from the list of 
required scenarios. These amendments align FHFA's rule with rules 
adopted by other financial institution regulators that implement the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act) stress testing requirements, as amended by EGRRCPA.

DATES: This rule is effective: March 24, 2020.

FOR FURTHER INFORMATION CONTACT: Naa Awaa Tagoe, Senior Associate 
Director, Office of Financial Analysis, Modeling and Simulations, (202) 
649-3140, [email protected]; Karen Heidel, Assistant General 
Counsel, Office of General Counsel, (202) 649-3073, 
[email protected]; or Mark D. Laponsky, Deputy General Counsel, 
Office of General Counsel, (202) 649-3054, [email protected]. The 
telephone number for the Telecommunications Device for the Deaf is 
(800) 877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 401 of the EGRRCPA, (Pub. L. 115-174, section 401) amended 
the Dodd-Frank Act requirements to implement stress testing. Prior to 
the passage of the EGRRCPA,\1\ section 165(i) of the Dodd-Frank Act \2\ 
required each financial company with total consolidated assets of more 
than $10 billion to conduct annual stress tests. In addition, section 
165 required FHFA to issue regulations for regulated entities to 
conduct their stress tests, which were required to include at least 
three different stress testing scenarios: ``baseline,'' ``adverse,'' 
and ``severely adverse.'' \3\ In September 2013, FHFA published in the 
Federal Register a final rule implementing the Dodd-Frank Act stress 
testing requirements. FHFA's regulation, located at 12 CFR part 1238, 
requires each regulated entity to conduct an annual stress test based 
on scenarios provided by FHFA and consistent with FHFA prescribed 
methodologies and practices. The regulation also requires that the 
agency issue to the regulated entities stress test scenarios that are 
generally consistent with and comparable to those developed by the FRB 
not later than 30 days after the FRB publishes its scenarios.\4\
---------------------------------------------------------------------------

    \1\ Public Law 115-174, 132 Stat. 1296 (2018).
    \2\ Public Law 111-203, 124 Stat. 1376 (2010), codified at 12 
U.S.C. 5365.
    \3\ 12 U.S.C. 5365(i)(2)(C).
    \4\ 12 CFR 1238.3(b).
---------------------------------------------------------------------------

    Section 401 of EGRRCPA amended certain aspects of the stress 
testing requirements applicable to financial companies in section 
165(i) of the Dodd-Frank Act.\5\ Specifically, after 18 months, section 
401 of EGRRCPA raises the minimum asset threshold for application of 
the stress testing requirement from $10 billion to $250 billion in 
total consolidated assets, revises the requirement for financial 
companies to conduct stress tests ``annually,'' and instead requires 
them to conduct stress tests ``periodically'', and no longer requires 
the stress test to include an ``adverse'' scenario, thus reducing the 
number of required stress test scenarios from three to two.
---------------------------------------------------------------------------

    \5\ Public Law 115-174, 132 Stat. 1296-1368 (2018).
---------------------------------------------------------------------------

II. Discussion of Public Comments

    On December 16, 2019, FHFA published in the Federal Register 
proposed amendments to the stress testing requirements for the 
regulated entities. The comment period closed on January 15, 2020. FHFA 
received one comment which stated that the threshold of $250 billion in 
total consolidated assets was too high and lowering the threshold to 
$100 billion in total consolidated assets would be more appropriate. 
EGRRCPA set the threshold at $250 billion in total consolidated assets 
and the proposed rule reflects this statutory requirement. The 
Enterprises will continue to be covered by the rule at its new 
threshold, however, the Banks will not. After several years of 
assessing the Banks' stress tests, FHFA believes that its other 
supervision tools are sufficient for the agency's purposes, and that 
the additional burden on the Banks of conducting the annual stress 
tests is not necessary. FHFA retains under its general supervisory 
powers the discretion to require stress testing by the Banks if FHFA 
determines that it would be useful. Therefore, FHFA is adopting as its 
final rule the same rule proposed on December 16, 2019, without any 
change.

III. Summary of Final Rule

    FHFA is adopting the proposed revisions to FHFA's rule without 
change as follows: The rule discontinues the Dodd-Frank Act stress 
testing of the Banks; prescribes the frequency of stress testing; and 
reduces the number of scenarios mandated for Enterprise Dodd-Frank Act 
stress testing. These revisions are described in more detail below.

A. Minimum Asset Threshold

    As described above, section 401 of EGRRCPA amends section 165 of 
the Dodd-Frank Act by raising the minimum threshold for financial 
companies required to conduct stress tests from $10 billion to $250 
billion. As there are no Banks with total consolidated assets of over 
$250 billion, the Banks will no longer be subject to the stress testing 
requirements of this rule. As the total consolidated assets for each 
Enterprise exceed the $250 billion threshold, the Enterprises remain 
subject to stress testing under this rule.

[[Page 16529]]

B. Frequency of Stress Testing

    Section 401 of EGRRCPA also revised the requirement under section 
165 of the Dodd-Frank Act for financial companies to conduct stress 
tests, changing the required frequency from ``annual'' to ``periodic.'' 
The term ``periodic'' is not defined in EGRRCPA. Because of the 
Enterprises' total consolidated asset amounts, their function in the 
mortgage market, size of their retained portfolios, and their share of 
the mortgage securitization market, FHFA will continue to require the 
Enterprises to conduct stress tests on an annual basis. This is 
consistent with FHFA's regulatory mission to ensure each of the 
regulated entities ``operates in a safe and sound manner.'' \6\
---------------------------------------------------------------------------

    \6\ 12 U.S.C. 4513(a)(1)(B)
---------------------------------------------------------------------------

C. Removal of the ``Adverse'' Scenario

    As discussed above, section 401 of EGRRCPA amends section 165(i) of 
the Dodd-Frank Act to no longer require the FRB to include an 
``adverse'' stress-testing scenario, reducing the number of stress test 
scenarios from three to two. The ``baseline'' scenario is a set of 
conditions that affect the U.S. economy or the financial condition of 
the regulated entities, and that reflect the consensus views of the 
economic and financial outlook, and the ``severely adverse'' scenario 
is a more severe set of conditions and the most stringent of the former 
three scenarios. Although the ``adverse'' scenario has provided some 
additional value in limited circumstances, the ``baseline'' and 
``severely adverse'' scenarios largely cover the full range of expected 
and stressful conditions. Therefore FHFA does not consider it 
necessary, for its supervisory purposes, to require the additional 
burden of analyzing an ``adverse'' scenario.

IV. Coordination With the FRB and the Federal Insurance Office

    In accordance with section 165(i)(2)(C), FHFA has coordinated with 
both the FRB and the Federal Insurance Office (FIO). On November 1, 
2019, the FRB published a final rule which revised ``the minimum 
threshold for state member banks to conduct stress tests from $10 
billion to $250 billion,'' and revised ``the frequency with which state 
member banks with assets greater than $250 billion would be required to 
conduct stress tests,'' in addition to removing the adverse scenario 
from the list of required scenarios.\7\ The FDIC adopted its final 
rule; \8\ and the OCC its final rule.\9\ Although FHFA's final rule is 
not identical to those of the FRB, the FDIC, and the OCC, it is 
consistent and comparable with them.
---------------------------------------------------------------------------

    \7\ 84 FR 59032 (Nov. 1, 2019).
    \8\ 84 FR 56929 (Oct. 24, 2019).
    \9\ 84 FR 54472 (Oct. 10, 2019).
---------------------------------------------------------------------------

V. Paperwork Reduction Act

    The final rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501, et 
seq.). Therefore, FHFA has not submitted any information to the Office 
of Management and Budget for review.

VI. Administrative Procedure Act

    This final rule is effective immediately upon publication in the 
Federal Register. Section 553(d)(3) of the Administrative Procedure Act 
(APA) provides for a delayed effective date after publication of a 
rule, except ``as otherwise provided by the agency for good cause found 
and published with the rule.'' The changes to part 1238 primarily cover 
how FHFA will implement the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) stress testing requirements, as amended 
by section 401 of EGRRCPA. These amendments, applicable to large 
financial companies, became effective on November 24, 2019. Consistent 
with section 553(d)(3) and for the reasons discussed below, FHFA finds 
good cause exists to publish this final rule with an immediate 
effective date. Without this rule, the Enterprises and Federal Home 
Loan Banks will be required to conduct stress testing under the prior 
rule, incurring additional expense and burden which FHFA has determined 
is not necessary for purposes of safety and soundness. In addition, an 
immediate effective date permits FHFA to synchronize its supervisory 
efforts related to stress testing with the FRB and the FDIC. 
Accordingly, the FHFA finds good cause for the final rule to take 
effect immediately upon publication in the Federal Register.

VII. Regulatory Flexibility Act

    The final rule applies only to the regulated entities, which do not 
come within the meaning of small entities as defined in the Regulatory 
Flexibility Act (see 5 U.S.C. 601(6)). Therefore, in accordance with 
section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 605(b)), the 
General Counsel of FHFA certifies that this final rule will not have a 
significant economic impact on a substantial number of small entities.

VIII. Congressional Review Act

    In accordance with the Congressional Review Act (5 U.S.C. 801 et 
seq.), FHFA has determined that this final rule is not a major rule and 
has verified this determination with the Office of Information and 
Regulatory Affairs of the OMB.

List of Subjects in 12 CFR Part 1238

    Administrative practice and procedure, Capital, Federal Home Loan 
Banks, Government-sponsored enterprises, Regulated entities, Reporting 
and recordkeeping requirements, Stress test.

Authority and Issuance

    For the reasons stated in the preamble, and under the authority of 
12 U.S.C. 5365(i), FHFA amends part 1238 of Title 12 of the Code of 
Federal Regulations as follows:

PART 1238--STRESS TESTING OF REGULATED ENTITIES

0
1. The authority citation for part 1238 continues to read as follows:

    Authority: 12 U.S.C. 1426, 4513, 4526, 4612; 5365(i).


0
2. Revise Sec.  1238.1 to read as follows:


Sec.  1238.1  Authority and purpose.

    (a) Authority. This part is issued by the Federal Housing Finance 
Agency (FHFA) under section 165(i) of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank Act), Public Law 111-203, 124 
Stat. 1376, 1423-32 (2010), 12 U.S.C. 5365(i), as amended by section 
401 of the Economic Growth, Regulatory Relief, and Consumer Protection 
Act (EGRRCPA), Public Law 115-174, 132 Stat. 1296 (2018), 12 U.S.C. 
5365(i); and the Safety and Soundness Act (12 U.S.C. 4513, 4526, 4612).
    (b) Purpose. (1) This part implements section 165(i)(2) of the 
Dodd-Frank Act, as amended by section 401 of the EGRRCPA, which 
requires all large financial companies that have total consolidated 
assets of more than $250 billion, and are regulated by a primary 
federal financial regulatory agency, to conduct periodic stress tests.
    (2) This part establishes requirements that apply to each 
Enterprise's performance of periodic stress tests. The purpose of the 
periodic stress test is to provide the Enterprises, FHFA, and the FRB 
with additional, forward-looking information that will help them to 
assess capital adequacy at the Enterprises under various scenarios; to 
review the Enterprises' stress test results; and to increase public

[[Page 16530]]

disclosure of the Enterprises' capital condition by requiring broad 
dissemination of the stress test scenarios and results.


0
3. Revise Sec.  1238.2 to read as follows:


Sec.  1238.2  Definitions.

    For purposes of this part, the following definitions apply:
    Planning horizon means the period of time over which the stress 
projections must extend. The planning horizon cannot be less than nine 
quarters.
    Scenarios are sets of economic and financial conditions used in the 
Enterprises' stress tests, including baseline and severely adverse.
    Stress test is a process to assess the potential impact on an 
Enterprise of economic and financial conditions (``scenarios'') on the 
consolidated earnings, losses, and capital of the Enterprise over a set 
planning horizon, taking into account the current condition of the 
Enterprise and the Enterprise's risks, exposures, strategies, and 
activities.


0
4. Revise Sec.  1238.3 to read as follows:


Sec.  1238.3  Annual stress test.

    (a) In general. Each Enterprise:
    (1) Shall complete an annual stress test of itself based on its 
data as of December 31 of the preceding calendar year;
    (2) The stress test shall be conducted in accordance with this 
section and the methodologies and practices described in Sec.  1238.4 
and in a supplemental guidance or order.
    (b) Scenarios provided by FHFA. In conducting its annual stress 
tests under this section, each Enterprise must use scenarios provided 
by FHFA, which shall be generally consistent with and comparable to 
those established by the FRB, that reflect a minimum of two sets of 
economic and financial conditions, including a baseline and severely 
adverse scenario. Not later than 30 days after the FRB publishes its 
scenarios, FHFA will issue to the Enterprises a description of the 
baseline and severely adverse scenarios that each Enterprise shall use 
to conduct its annual stress tests under this part.


0
5. Revise Sec.  1238.4 to read as follows:


Sec.  1238.4  Methodologies and practices.

    (a) Potential impact. Except as noted in this subpart, in 
conducting a stress test under Sec.  1238.3, each Enterprise shall 
calculate how each of the following is affected during each quarter of 
the stress test planning horizon, for each scenario:
    (1) Potential losses, pre-provision net revenues, and future pro 
forma capital positions over the planning horizon; and
    (2) Capital levels and capital ratios, including regulatory capital 
and net worth, and any other capital ratios specified by FHFA.
    (b) Planning horizon. Each Enterprise must use a planning horizon 
of at least nine quarters over which the impact of specified scenarios 
would be assessed.
    (c) Additional analytical techniques. If FHFA determines that the 
stress test methodologies and practices of an Enterprise are deficient, 
FHFA may determine that additional or alternative analytical techniques 
and exercises are appropriate for an Enterprise to use in identifying, 
measuring, and monitoring risks to the financial soundness of the 
Enterprise, and require an Enterprise to implement such techniques and 
exercises in order to fulfill the requirements of this part. In 
addition, FHFA will issue guidance annually to describe the baseline 
and severely adverse scenarios, and methodologies to be used in 
conducting the annual stress test.
    (d) Controls and oversight of the stress testing processes. (1) The 
appropriate senior management of each Enterprise must ensure that the 
Enterprise establishes and maintains a system of controls, oversight, 
and documentation, including policies and procedures, designed to 
ensure that the stress testing processes used by the Enterprises are 
effective in meeting the requirements of this part. These policies and 
procedures must, at a minimum, describe the Enterprise's testing 
practices and methodologies, validation and use of stress test results, 
and processes for updating the Enterprise's stress testing practices 
consistent with relevant supervisory guidance;
    (2) The board of directors, or a designated committee thereof, 
shall review and approve the policies and procedures established to 
comply with this part as frequently as economic conditions or the 
condition of the Enterprise warrants, but at least annually; and
    (3) Senior management of the Enterprise and each member of the 
board of directors shall receive a summary of the stress test results.


0
6. Revise Sec.  1238.5 to read as follows:


Sec.  1238.5  Required report to FHFA and FRB of stress test results 
and related information.

    (a) Report required for stress tests. On or before May 20 of each 
year, the Enterprises must report the results of the stress tests 
required under Sec.  1238.3 to FHFA, and to the FRB, in accordance with 
paragraph (b) of this section;
    (b) Content of the report for annual stress test. Each Enterprise 
must file a report in the manner and form established by FHFA.
    (c) Confidential treatment of information submitted. Reports 
submitted to FHFA under this part are FHFA property and records (as 
defined in 12 CFR part 1202). The reports are and include non-public 
information contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of, FHFA in 
connection with the performance of the agency's responsibilities 
regulating or supervising the Enterprises. Disclosure of any reports 
submitted to FHFA or the information contained in any such report is 
prohibited unless authorized by this part, legal obligation, or 
otherwise by the Director of FHFA.


0
7. Revise Sec.  1238.6 to read as follows:


Sec.  1238.6  Post-assessment actions by the Enterprises.

    Each Enterprise shall take the results of the stress test conducted 
under Sec.  1238.3 into account in making changes, as appropriate, to 
the Enterprise's capital structure (including the level and composition 
of capital); its exposures, concentrations, and risk positions; any 
plans for recovery and resolution; and to improve overall risk 
management. If an Enterprise is under FHFA conservatorship, any post-
assessment actions shall require prior FHFA approval.


0
8. Revise Sec.  1238.7 to read as follows:


Sec.  1238.7  Publication of results by regulated entities.

    (a) Public disclosure of results required for stress tests of the 
Enterprises. The Enterprises must disclose publicly a summary of the 
stress test results for the severely adverse scenario not earlier than 
August 1 and not later than August 15 of each year. The summary may be 
published on the Enterprise's website or in any other form that is 
reasonably accessible to the public.
    (b) Information to be disclosed in the summary. The information 
disclosed by each Enterprise shall, at minimum, include--
    (1) A description of the types of risks being included in the 
stress test;
    (2) A high-level description of the scenario provided by FHFA, 
including key variables (such as GDP, unemployment rate, housing 
prices, and foreclosure rate, etc.);
    (3) A general description of the methodologies employed to estimate 
losses, pre-provision net revenue, and changes in capital positions 
over the planning horizon;

[[Page 16531]]

    (4) A general description of the use of the required stress test as 
one element in an Enterprise's overall capital planning and capital 
assessment. If an Enterprise is under conservatorship, this description 
shall be coordinated with FHFA;
    (5) Aggregate losses, pre-provision net revenue, net income, net 
worth, pro forma capital levels and capital ratios (including 
regulatory and any other capital ratios specified by FHFA) over the 
planning horizon, under the scenario; and
    (6) Such other data fields, in such form (e.g., aggregated), as the 
Director may require.

    Dated: March 11, 2020.
Mark A. Calabria,
Director, Federal Housing Finance Agency.
[FR Doc. 2020-05476 Filed 3-23-20; 8:45 am]
BILLING CODE 8070-01-P