Dodd-Frank Act Stress Test 2014: Supervisory Stress Test Methodology and Results
- Supervisory Stress Test Framework and Model Methodology
- Revised Capital Framework
- Supervisory Stress Test Results
- Appendix A: Supervisory Scenarios
Dodd-Frank Act Stress Testing
To provide context to the Federal Reserve's Dodd-Frank Act supervisory stress test results, the following sections contain an overview of the Federal Reserve's Dodd-Frank Act stress test rules, focusing on the process for the supervisory stress tests and the requirements for company-run stress tests for covered companies. 10
Supervisory Stress Tests
Under the Federal Reserve's Dodd-Frank Act stress test rules, the Federal Reserve conducts annual supervisory stress tests to evaluate whether a covered company has the capital, on a total consolidated basis, necessary to absorb losses and continue its operations by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve as a credit intermediary under stressful economic and financial market conditions. As part of this supervisory stress test for each company, the Federal Reserve projects the balance sheet, net income, and resulting post-stress capital levels, regulatory capital ratios, and the tier 1 common ratio under three scenarios (baseline, adverse, and severely adverse) using data as of September 30.
The stress test rules feature a common set of scenarios for all companies in the supervisory stress test. However, the Federal Reserve may use additional scenarios or components of scenarios for all or a subset of the companies to capture salient sources of risk, and these scenarios may use data from dates other than the end of the third quarter. This year, the Federal Reserve applied the global market shock to six BHCs with large trading and private equity exposures and a counterparty default component to eight BHCs with substantial trading and custodial operations.
Finally, the Dodd-Frank Act requires the Federal Reserve to disclose a summary of the results of its supervisory stress test.11
Company-Run Stress Tests
As required by the Dodd-Frank Act, the Federal Reserve's stress test rules covered companies to conduct two company-run stress tests each year. In conducting the "annual" test, covered companies use data as of September 30 and reports their stress test results to the Federal Reserve by January 5.12 In addition, covered companies must conduct a "mid-cycle" test and report the results to the Federal Reserve by July 5. The Dodd-Frank Act stress test rules align the timing of annual company-run stress tests with the annual supervisory stress tests of covered companies.
In their annual stress tests, covered companies must use the scenarios provided by the Federal Reserve. Each year, the Federal Reserve will provide at least three scenarios--baseline, adverse, and severely adverse--that are identical to the scenarios the Federal Reserve uses in the annual supervisory stress tests of companies.13 By providing a common set of scenarios to all companies, the results of company-run and supervisory stress tests will be comparable across companies. To further enhance comparability, the supervisory stress tests and company-run stress tests conducted under the Dodd-Frank Act stress test rules use the same capital action assumptions.14
Finally, each covered company must publicly disclose a summary of the results of its company-run stress test under the severely adverse scenario provided by the Federal Reserve.
10. A ‘‘covered company'' includes any bank holding company with total consolidated assets of $50 billion or more and each nonbank financial company that the Financial Stability Oversight Council has designated for supervision by the Board. Return to text
11. 12 U.S.C. 5365(i)(1)(B)(v). Return to text
12. Under the Dodd-Frank Act, all financial companies with more than $10 billion in total consolidated assets that are supervised by a primary federal financial regulatory agency are required to conduct an annual company-run stress test. However, only the covered companies are subject to the additional mid-cycle stress test and the supervisory stress test. For the stress test cycle that began October 1, 2013, there are 37 bank and thrift subsidiaries of the covered companies that are conducting Dodd-Frank Act stress tests under rules separately finalized by the Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. Apart from the covered company subsidiaries, there are an additional 42 BHCs and 57 banks and thrifts with between $10 and $50 billion in assets and 4 banks and thrifts with $50 billion or greater in assets conducting Dodd-Frank Act stress tests under those rules. Return to text
13. Under the stress test rules, the Federal Reserve will provide the scenarios to companies no later than November 15 each year. See 12 CFR 252.54(b)(1); 12 CFR 252.14(b)(1). Return to text
14. 12 CFR 252.156(b). Return to text