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Agencies Release Scenarios for Bank Stress Tests

The FDIC and OCC have released economic and financial market scenarios that will be used in upcoming stress tests for national banks and federal savings associations with more than $10 billion in total assets. The Dodd-Frank Act instituted stress test requirements to project how financial institutions’ capital levels would fare in hypothetical stressful economic and financial scenarios.

The supervisory market scenarios include baseline, adverse and severely adverse scenarios, and the OCC will provide scenarios to institutions by Feb. 15 of each year, according to the agency’s stress test rule. The objective of the “stress test is to ensure that institutions have robust, forward-looking capital planning processes that account for their unique risks, and to help ensure that institutions have sufficient capital to continue operations throughout times of economic and financial stress,” according to the OCC.

The effectiveness of stress test programs of financial institutions by certain government agencies came under fire late last year after a study by the GAO indicated that the programs’ limitations could hamper their effectiveness in determining whether institutions have sufficient capital to remain solvent under difficult economic conditions.

The GAO report identified several means of improving the programs’ efficacy, and recommendations included that the Fed, FDIC and OCC “harmonize” their agencies’ approaches to granting extensions and exemptions from stress test requirements to ensure that institutions overseen by different regulators receive consistent regulatory treatment. The GAO also recommended publicly disclosing additional information that would help financial institutions better understand “the methodology for completing qualitative assessments, such as the role of ratings and rankings and the extent to which they affect final determination decisions,” according to the report.

Both the FDIC and OCC on Feb. 10 released revised economic scenarios for the 2017 stress tests. The previously released scenarios contained incorrect historical values for the BBB corporate yield in 2016, according to the FDIC. The Board of Governors of the Federal Reserve System and the OCC, who the FDIC works with to develop and distribute the scenarios, also issued revised data.

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