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Home 2014 DFAST CCAR Comparison of Dodd-Frank Stress Tests for Large and Mid-Size Banking Organizations

Comparison of Dodd-Frank Stress Tests for Large and Mid-Size Banking Organizations

The following chart provides a high-level comparison of the Federal Reserve’s Dodd-Frank stress testing requirements, related reporting requirements and supervisory expectations for  (1) large banking organizations (≥$50 billion in total consolidated assets) and (2) mid-size banking organizations (>$10 billion and < $50 billion in total consolidated assets).  The comparison chart is based on information contained in a recent Federal Reserve Supervision and Regulation (SR) letter.  Our blackline of the U.S. banking agencies’ final vs. proposed Dodd-Frank stress test supervisory guidance for mid-size banking organizations is available here.

Large banking organizations (≥$50 billion in total consolidated assets)   Mid-size banking organizations (>$10 billion and < $50 billion in total consolidated assets)
General Stress Testing Requirements
Large bank holding companies (BHCs) must participate in Federal Reserve’s annual Comprehensive Capital Analysis and Review (CCAR) exercise Mid-size BHCs do not participate in CCAR
Large BHCs are subject to annual supervisory stress tests

  • Federal Reserve publicly discloses summary results of supervisory stress tests
Mid-size BHCs are not subject to supervisory stress tests
Large BHCs must submit annual capital plans to Federal Reserve

  • Subject to Federal Reserve approval of results, capital plan and capital actions
  • Must maintain > 5% post-stress Tier 1 Common ratio
  • Must use both supervisory and BHC-specific stress test scenarios
Mid-size BHCs are not subject to Federal Reserve’s capital plan rule

  • No required minimum post-stress capital ratios
  • No formal supervisory approval associated with stress testing
  • Only required to use supervisory scenarios in Dodd-Frank company-run stress tests
Dodd-Frank company-run stress test

  • Semi-annual submissions by January 5th and July 5th of each year
  • Report on form FR Y-14A
  • Semi-annual public disclosures of summary results (March and September)
Dodd-Frank company-run stress test

  • Annual submission by March 31st of each year
  • Report on form FR Y-16
  • Annual public disclosure of summary results beginning in June 2015
Incorporation of U.S. Basel III into stress testing

  • Must incorporate U.S. Basel III capital framework in capital projections
  • Tier 1 Common ratio is calculated using existing capital rules
Incorporation of U.S. Basel III into stress testing

  • Not required to incorporate U.S. Basel III capital framework in capital projections until the 2015 stress testing cycle starting in October 2014
  • Not required to calculate Tier 1 Common ratio for 2014 stress testing cycle
Dodd-Frank Stress Test Reporting Requirements
Form FR Y-14A for large BHCs

  • Annual and semi-annual (mid-cycle) submission
  • Approximately 2,500 line items per scenario for annual and 1,900 for semi-annual (mid-cycle) submission
Form FR Y-16 for mid-size BHCs, state member banks (SMBs) and savings and loan holding companies (SLHCs)

  • Annual submission
  • Summary report with approximately 100 line items per scenario
FR Y-14Q for supervisory stress test

  • Quarterly submission
  • Loan-level data collected
Not applicable
FR Y-14M for supervisory stress test

  • Monthly submission
  • Loan-level data collected
Not applicable
Federal Reserve’s Minimum Supervisory Expectations for Dodd-Frank Stress Tests
Stress test scenarios

  • Large BHCs must develop BHC-specific scenarios to stress key vulnerabilities and identify idiosyncratic risk drivers
Stress test scenarios

  • Not required to develop own scenarios
Data sources and segmentation

  • Proxy data acceptable, but generally expected to use internally generated data
  • Data segmented at least as detailed as FR Y-14A (approximately 2,500 lines per scenario)
Data sources and segmentation

  • May use industry data as a proxy under certain conditions
  • Data segmented by FR Y-16 (approximately 100 lines per scenario) and largely reflects Call Report and FR Y-9C report
Loss estimation

  • Identify key loss drivers; indicate how the scenarios affect those drivers and losses
  • More granular loss estimation expectations using FR Y-14A segmentation
Loss estimation

  • May choose to base their stress losses on industry historical loss experience
  • May be able to estimate credit losses on an aggregate level (top-down approach) using FR Y-16 segmentation
Operational losses

  • Expected to include operational loss estimates
Operational losses

  • Include aggregate operational losses in Pre-Provision Net Revenue (PPNR) only if directly related to macroeconomic and financial scenarios provided by supervisors
PPNR

  • Granular estimation approach
  • Use internal revenue and expense data to estimate business lines’ revenues and expenses
  • Identify specific drivers of revenue and expenses and analyze how supervisory scenarios affect those drivers
PPNR

  • Less granular “top of the house” approach
  • Project PPNR based on three main components (net interest income, noninterest income and noninterest expense)
  • Can project at an aggregate, company-wide level, and may be based on industry experience
Balance sheet and risk-weighted assets

  • Projections for each major segment of the balance sheet for FR Y-14A
Balance sheet and risk-weighted assets

  • In some cases, may use a simple, constant method for projecting full balance sheet and risk weighted assets
Controls, oversight and documentation

  • Must be an integral part of preparing and submitting capital plan and the resolution and recovery planning process
Controls, oversight and documentation

  • Must consider the role of stress testing results in the normal course of business (e.g., capital planning, assessment of capital adequacy and risk management)

Materials:

Federal Reserve, SR 14-3:  Supervisory Guidance on Dodd-Frank Act Company-Run Stress Testing for Banking Organizations with Total Consolidated Assets of More Than $10 Billion but Less Than $50 Billion (Mar. 6, 2014) available here: http://www.federalreserve.gov/bankinforeg/srletters/sr1403.pdf

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