(1) General. A bank 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 bank 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 bank 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 (iii) of this section, the bank holding company must address the
potential direct adverse impact of associated market disruptions on
the bank holding company and incorporate the potential actions of
other market participants experiencing liquidity stresses under the
market disruptions that would adversely affect the bank holding company.
(2) Frequency. The bank 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), or as directed by the Board:
(i) If the bank holding company is not
a Category IV bank holding company, at least monthly; or
(ii) If the bank holding company is
a Category IV bank holding company, at least quarterly.
(3) Stress
scenarios.
(i) Each liquidity 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 bank holding company; and
(C) A scenario reflecting combined market
and idiosyncratic stresses.
(ii) The bank 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 bank 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 bank 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 bank 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 bank holding company’s capital structure, risk profile,
complexity, activities, and size.
(7) Governance.
(i) Policies
and procedures. A bank 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 bank holding
company 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 bank 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 252.34(d) of this subpart.
(iii) Management
information systems. The bank 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 bank 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 bank 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 bank 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 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 bank 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 (iii) of this section.
(2) Net stressed
cash-flow need. The net stressed cash-flow need for a bank 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 bank 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 bank 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 bank
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 252.35(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 bank
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.
