(a) Potential
impact on capital. In conducting a stress test under section
252.54, 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 the regulatory
capital levels and ratios applicable to the covered bank, and any
other capital ratios specified by the Board, and in doing so must:
(i) Incorporate the
effects of any capital action over the planning horizon and maintenance
of an allowance for loan losses or adjusted allowance for credit losses,
as 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 252.54, 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);
(ii)
When assessing the covered company’s exposures, concentrations, and
risk positions; and
(iii) In
the development or implementation of any plans of the covered company
for recovery or resolution.
