(a) Potential
impact on capital. In conducting a stress test under section
238.143, for each quarter of the planning horizon, a covered company
must estimate the following for each scenario required to be used:
(1) Losses,
pre-provision net revenue, provision for credit losses, and net income;
and
(2) The potential impact on pro forma regulatory capital levels and pro forma capital
ratios (including regulatory capital ratios and any other capital
ratios specified by the Board), and in so doing must:
(i) Incorporate the effects of any
capital actions over the planning horizon and maintenance of an allowance
for credit losses appropriate for credit exposures throughout the
planning horizon; and
(ii) Exclude
the impacts of changes to a firm’s business plan that are likely to
have a material impact on the covered company’s capital adequacy and
funding profile.
(b) Assumptions regarding capital actions. In
conducting a stress test under section 238.143, a covered company
is required to make the following assumptions regarding its capital
actions over the planning horizon:
(1) The covered company will not pay any
dividends on any instruments that qualify as common equity tier 1
capital;
(2) The covered company
will make payments on instruments that qualify as additional tier
1 capital or tier 2 capital equal to the stated dividend, interest,
or principal due on such instrument;
(3) The covered company will not make a redemption or repurchase
of any capital instrument that is eligible for inclusion in the numerator
of a regulatory capital ratio; and
(4) The covered company will not make any issuances of common stock
or preferred stock.
(c) Controls and oversight of stress testing processes.
(1) In general. The senior management of a covered company must establish and maintain
a system of controls, oversight, and documentation, including policies
and procedures, that are designed to ensure that its stress testing
processes are effective in meeting the requirements in this subpart.
These policies and procedures must, at a minimum, describe the covered
company’s stress testing practices and methodologies, and processes
for validating and updating the company’s stress test practices and
methodologies consistent with applicable laws and regulations.
(2) Oversight
of stress testing processes. The board of directors, or a committee
thereof, of a covered company must review and approve the policies
and procedures of the stress testing processes as frequently as economic
conditions or the condition of the covered company may warrant, but
no less than each year a stress test is conducted. The board of directors
and senior management of the covered company must receive a summary
of the results of any stress test conducted under this subpart.
(3) Role
of stress testing results. The board of directors and senior
management of each covered company must consider the results of the
analysis it conducts under this subpart, as appropriate:
(i) As part of the covered company’s
capital plan and capital planning process, including when making changes
to the covered company’s capital structure (including the level and
composition of capital); and
(ii) When assessing the covered company’s exposures, concentrations,
and risk positions.
