(1) General. A covered savings and loan holding
company subject to this subpart must conduct stress tests to assess
the potential impact of the liquidity stress scenarios set forth in
paragraph (a)(3) of this section on its cash flows, liquidity position,
profitability, and solvency, taking into account its current liquidity
condition, risks, exposures, strategies, and activities.
(i) The covered savings and loan
holding company must take into consideration its balance sheet exposures,
off-balance sheet exposures, size, risk profile, complexity, business
lines, organizational structure, and other characteristics of the
covered savings and loan holding company that affect its liquidity
risk profile in conducting its stress test.
(ii) In conducting a liquidity stress
test using the scenarios described in paragraphs (a)(3)(i) and (ii)
of this section, the covered savings and loan holding company must
address the potential direct adverse impact of associated market disruptions
on the covered savings and loan holding company and incorporate the
potential actions of other market participants experiencing liquidity
stresses under the market disruptions that would adversely affect
the covered savings and loan holding company.
(2) Frequency. The covered savings and loan holding company must perform the liquidity
stress tests required under paragraph (a)(1) of this section according
to the frequency specified in paragraph (a)(2)(i) or (ii) of this
section or as directed by the Board:
(i) If the covered savings and loan
holding company is not a Category IV savings and loan holding company,
at least monthly; or
(ii) If
the covered savings and loan holding company is a Category IV savings
and loan holding company, at least quarterly.
(3) Stress scenarios.
(i) Each stress
test conducted under paragraph (a)(1) of this section must include,
at a minimum:
(A) A scenario
reflecting adverse market conditions;
(B) A scenario reflecting an idiosyncratic stress event for the covered
savings and loan holding company; and
(C) A scenario reflecting combined market and idiosyncratic stresses.
(ii) The covered
savings and loan holding company must incorporate additional liquidity
stress scenarios into its liquidity stress test, as appropriate, based
on its financial condition, size, complexity, risk profile, scope
of operations, or activities. The Board may require the covered savings
and loan holding company to vary the underlying assumptions and stress
scenarios.
(4) Planning horizon. Each stress test conducted
under paragraph (a)(1) of this section must include an overnight planning
horizon, a 30-day planning horizon, a 90-day planning horizon, a one-year
planning horizon, and any other planning horizons that are relevant
to the covered savings and loan holding company’s liquidity risk profile.
For purposes of this section, a “planning horizon” is the period over
which the relevant stressed projections extend. The covered savings
and loan holding company must use the results of the stress test over
the 30-day planning horizon to calculate the size of the liquidity
buffer under paragraph (b) of this section.
(5) Requirements
for assets used as cash-flow sources in a stress test.
(i) To the extent an asset is used
as a cash flow source to offset projected funding needs during the
planning horizon in a liquidity stress test, the fair market value
of the asset must be discounted to reflect any credit risk and market
volatility of the asset.
(ii)
Assets used as cash-flow sources during a planning horizon must be
diversified by collateral, counterparty, borrowing capacity, and other
factors associated with the liquidity risk of the assets.
(iii) A line of credit does not qualify
as a cash flow source for purposes of a stress test with a planning
horizon of 30 days or less. A line of credit may qualify as a cash
flow source for purposes of a stress test with a planning horizon
that exceeds 30 days.
(6) Tailoring. Stress testing must
be tailored to, and provide sufficient detail to reflect, a covered
savings and loan holding company’s capital structure, risk profile,
complexity, activities, and size.
(7) Governance.
(i) Policies
and procedures. A covered savings and loan holding company subject
to this subpart must establish and maintain policies and procedures
governing its liquidity stress testing practices, methodologies, and
assumptions that provide for the incorporation of the results of liquidity
stress tests in future stress testing and for the enhancement of stress
testing practices over time.
(ii) Controls and oversight. A covered
savings and loan holding subject to this subpart must establish and
maintain a system of controls and oversight that is designed to ensure
that its liquidity stress testing processes are effective in meeting
the requirements of this section. The controls and oversight must
ensure that each liquidity stress test appropriately incorporates
conservative assumptions with respect to the stress scenario in paragraph
(a)(3) of this section and other elements of the stress test process,
taking into consideration the covered savings and loan holding company’s
capital structure, risk profile, complexity, activities, size, business
lines, legal entity or jurisdiction, and other relevant factors. The
assumptions must be approved by the chief risk officer and be subject
to the independent review under section 238.123(d).
(iii) Management
information systems. The covered savings and loan holding company
must maintain management information systems and data processes sufficient
to enable it to effectively and reliably collect, sort, and aggregate
data and other information related to liquidity stress testing.
(8) Notice and response. If the Board determines
that a covered savings and loan holding company must conduct liquidity
stress tests according to a frequency other than the frequency provided
in paragraphs (a)(2)(i) and (ii) of this section, the Board will notify
the covered savings and loan holding company before the change in
frequency takes effect, and describe the basis for its determination.
Within 14 calendar days of receipt of a notification under this paragraph,
the covered savings and loan holding company may request in writing that
the Board reconsider the requirement. The Board will respond in writing
to the company’s request for reconsideration prior to requiring that
the company conduct liquidity stress tests according to a frequency
other than the frequency provided in paragraphs (a)(2)(i) and (ii)
of this section.
(1) A covered savings and loan holding company subject to this subpart
must maintain a liquidity buffer that is sufficient to meet the projected
net stressed cash-flow need over the 30-day planning horizon of a
liquidity stress test conducted in accordance with paragraph (a) of
this section under each scenario set forth in paragraph (a)(3)(i)
through (ii) of this section.
(2) Net stressed cash-flow need. The net stressed
cash-flow need for a covered savings and loan holding company is the
difference between the amount of its cash-flow need and the amount
of its cash flow sources over the 30-day planning horizon.
(3) Asset requirements. The liquidity buffer must consist of highly liquid assets that are
unencumbered, as defined in paragraph (b)(3)(ii) of this section:
(i) Highly liquid asset. A highly liquid asset
includes:
(A) Cash;
(B) Assets that meet the criteria for
high quality liquid assets as defined in 12 CFR 249.20; or
(C) Any other asset that the covered savings
and loan holding company demonstrates to the satisfaction of the Board:
(1) Has low credit risk and low market risk;
(2) Is traded in an active secondary
two-way market that has committed market makers and independent bona fide offers to buy and sell so that a price reasonably related
to the last sales price or current bona fide competitive bid
and offer quotations can be determined within one day and settled
at that price within a reasonable time period conforming with trade
custom; and
(3) Is a type of
asset that investors historically have purchased in periods of financial
market distress during which market liquidity has been impaired.
(ii) Unencumbered. An asset is unencumbered
if it:
(A) Is free of
legal, regulatory, contractual, or other restrictions on the ability
of such company promptly to liquidate, sell or transfer the asset;
and
(B) Is either:
(1)
Not pledged or used to secure or provide credit enhancement to any
transaction; or
(2) Pledged
to a central bank or a U.S. government-sponsored enterprise, to the
extent potential credit secured by the asset is not currently extended
by such central bank or U.S. government-sponsored enterprise or any
of its consolidated subsidiaries.
(iii) Calculating the amount of a highly liquid asset. In calculating
the amount of a highly liquid asset included in the liquidity buffer,
the covered savings and loan holding company must discount the fair
market value of the asset to reflect any credit risk and market price
volatility of the asset.
(iv) Operational
requirements. With respect to the liquidity buffer, the bank
holding company must:
(A) Establish and implement policies and procedures that require
highly liquid assets comprising the liquidity buffer to be under the
control of the management function in the covered savings and loan
holding company that is charged with managing liquidity risk; and
(B) Demonstrate the capability to monetize
a highly liquid asset under each scenario required under section 238.124(a)(3).
(v) Diversification. The liquidity buffer must
not contain significant concentrations of highly liquid assets by
issuer, business sector, region, or other factor related to the covered
savings and loan holding company’s risk, except with respect to cash
and securities issued or guaranteed by the United States, a U.S. government
agency, or a U.S. government-sponsored enterprise.
