On January 17 the Federal Deposit Insurance Corporation approved a notice of proposed rulemaking (NPR) that would require certain depository institutions with more than $10 billion in consolidated assets to conduct annual capital-adequacy stress tests. The NPR, to implement section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), would apply to FDIC-insured state nonmember banks and FDIC-insured state-chartered savings associations with total consolidated assets of more than $10 billion. The FDIC regulated 23 state non-member banks with total assets of more than $10 billion as of September 30, 2011. The proposed rule expands upon proposed guidance issued on June 15, 2011 on covered banks’ stress testing as a part of overall institution risk management. That guidance included stress testing non-capital related aspects of financial condition. The Dodd-Frank Act requires each primary federal financial regulator, including the FDIC, to issue consistent and comparable stress-testing regulations for financial companies with total consolidated assets of more than $10 billion. In terms of its requirements, the NPR "is substantively similar to a proposal the Federal Reserve published in December 2011."

The NPR defines "stress test" as a process to assess the potential impact of economic and financial conditions on the consolidated earnings, losses and capital of the bank over a set planning horizon, taking into account the current condition of the bank and its risks, exposures, strategies, and activities. The NPR describes the content of the reports institutions are required to publish, and the timeline for conducting the stress tests and producing the required reports. Under the proposed rule, each covered bank would be required to conduct annual stress tests using the bank’s financial data as of September 30 of that year to assess the potential impact of different scenarios on the consolidated earnings and capital of that bank and certain related items over a nine-quarter forward-looking planning horizon, taking into account all relevant exposures and activities.

The stress tests "would provide forward-looking information that would assist the FDIC in assessing the capital adequacy of the banks covered by the rule. The banks that would be required to conduct the stress tests also are expected to benefit from improved internal assessments of capital adequacy and overall capital planning," according to the FDIC.

The FDIC’s proposal will be published in the Federal Register with a 60-day public comment period.

The guidance continues a trend, solidified by the Dodd-Frank Act, of having insured institutions do intense legwork to assist regulators in their supervisory capacity. Regulators believe that the work done will be of assistance to the institutions themselves.

To review the notice, click here.