Stress testing: Getting to credibility - Firms between $10 and $50 billion

August 2013
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Stress testing: Getting to credibility - Firms between $10 and $50 billion

At a glance

Analysis of the banking regulators' guidance on the Dodd Frank Act's stress testing requirements for firms between $10 and $50 billion.

As the banking regulators continue the push to finalize the implementation of the Dodd Frank Act’s stress testing requirements (“DFAST”), the latest release of long awaited guidance for firms between $10 and $50 billion has finally arrived. Earlier this month, the Board of Governors of the Federal Reserve (“FRB”), the Office of Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”) jointly issued proposed guidance. The comment periods end on September 25th for the FDIC’s and OCC’s proposal, and on September 30th for the FRB’s.

The draft guidance outlines supervisory expectations across five broad areas of enterprise-wide stress testing related to the DFAST final rule issued by banking regulators last year:

  • Supervisory scenarios
  • Data sources and segmentation
  • Loss estimation
  • Pre-provision net revenue, risk-weighted assets and balance sheet projections
  • Governance and controls

This guidance is intended to supplement the draft regulatory reporting templates and instructions issued by the regulators in March 2013 that midsize firms are expected to use for their first DFAST submissions in March 2014.

In addition to the midsize domestic firms, similarly-sized intermediate holding companies of foreign banking organizations will likely face similar reporting templates and supervisory expectations once the Enhanced Prudential Standards are finalized, which we expect will be by the end of this year.

Based on our discussions with several midsize firms, it is our view that the draft guidance addresses a number of firms’ core concerns, but also leaves important questions unanswered. This Financial Services Regulatory Brief introduces these questions across each of the five areas, and provides our perspective of the approach firms should be taking.


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