Stress testing: First at bat for midsized firms

February 2014
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Stress testing: First at bat for midsized firms

At a glance

Regulators will scrutinize midsized firms first stress testing submissions this spring.

With continued contraction of net interest margins and stabilization of credit losses over the past year, midsized firms (i.e., those with $10-50 billion in assets) are turning their attention to deploying capital in the M&A market to bolster their bottom line. Concurrently, this quarter of 2014 marks the beginning of a new season of Dodd-Frank Act Stress Testing (“DFAST”) for banks and bank holding companies (“BHCs”) that will likely influence firms’ capital deployment decisions.

While the largest and most complex firms face a raised stress testing bar in 2014, midsized firms face the challenge of performing their annual company-run stress tests for the first time. Although banking regulators have stated that they will view these initial DFAST submissions as works in progress, they have also issued clear guidance on what these submissions must comprise. While midsized firms are not required to publicly disclose their 2014 stress testing results, they will need to demonstrate best efforts toward compliance. Particularly, looking forward to their 2015 submissions, firms must provide an analysis of stress testing process enhancements to be completed during 2014 as part of their March 2014 submissions.

In preparation for their first DFAST submissions, midsized firms are focused on plans to enhance their stress testing processes, and on completing capital stress testing efforts and compiling required supporting documents. To that end, resources must be optimally allocated to timely complete the DFAST package for internal approval (by senior management and the board of directors) and submission to the regulators.

This Financial Services Regulatory Brief provides an overview of DFAST 2014’s qualitative documentation requirements (including process enhancement plans), and our view on what midsized firms must do to meet evolving regulatory expectations regarding (a) assessing capital adequacy, (b) utilizing stress testing as a risk management tool, and (c) addressing internal controls.

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