New Stress Test Measures Unveiled for FDIC-Supervised Big Banks

WASHINGTON — Stress tests aren't just for money-center banks anymore.

Following last month's release of stress-test guidelines for the biggest firms, the Federal Deposit Insurance Corp. proposed new requirements Tuesday for FDIC-supervised banks with more than $10 billion of assets.

The proposal would force such institutions to conduct their own annual stress tests, including how their capital would hold up in a crisis scenario.

"It's an important forward-looking mechanism for institutions to identify their risks and act accordingly," Acting FDIC Chairman Martin Gruenberg said at the Tuesday meeting of the agency's board of directors.

The FDIC board also revised an earlier rule on the resolution plans drafted by depository institutions greater than $50 billion of assets.

The meeting also featured the first board appearance of Richard Cordray, the controversial, recess-appointed head of the Consumer Financial Protection Bureau, which under Dodd-Frank gets an FDIC seat. Cordray largely kept a low-profile at the meeting, but said it was "notable" how regulators have cooperated in coordinating the various stress test rules.

"That's how we hope to do our work as well," he said.

The Federal Reserve Board released a proposal in December that provided guidance on how it would conduct stress tests on firms with more than $50 billion of assets. The FDIC's proposal dictates rules of the road for medium and large-sized state non-member banks, while the Office of the Comptroller of the Currency is expected to release a similar proposal soon for national banks and thrifts. (The Fed included stress test measures for certain state-chartered banks in its initial proposal last month.)

The proposal would only affect 23 FDIC-supervised banks (the vast majority of state non-member banks are small), and would require them to lay out three hypothetical economic scenarios under which they would test their systems. In each scenario, a bank would have to calculate hypothetical losses, net revenues, loan loss reserves and its "pro forma" capital positions.

Stress tests in a given year would be conducted based on a bank's Sept. 30 call-report data. Under a proposed timeline, the FDIC would inform banks of the three scenarios no later than mid-November. By Jan. 5, banks would have had to submit their stress-test reports. Three months later, an institution would have to publicly disclose certain information to summarize its results.

"The proposed rule also requires covered banks to maintain a system of controls, oversight and documentation designed to ensure the stress-testing processes used by the bank are effective in meeting the requirements of the proposed rule," George French, a deputy director in the FDIC's division of risk management supervision, told the board.

Thomas Curry, an FDIC board member, who is also the pending nominee to run the OCC, called the stress testing requirements "another tool in the regulatory toolbox."

They are "particularly useful in assessing the capital structure of banks … and also their overall risk management," Curry said.

The FDIC's proposal noted that while Dodd-Frank requires stress tests for both a "parent company and … each subsidiary financial company (including covered banks) that individually have more than $10 billion in total consolidated assets," the agency will work with other regulators "to avoid unnecessary complexity or duplication of effort."

Without any discussion, the FDIC board also finalized a rule requiring resolution plans — also known as "living wills" — from large depository institutions. Among other changes, the final rule — which revised a September interim rule and applies to banks and thrifts with over $50 billion in assets — changed the initial deadline for the living wills to align with due dates in a joint Fed-FDIC regulation on wills from large holding companies. The first round of wills are due in July.