Background on Dodd-Frank Act Stress Testing
In the wake of the financial crisis, Congress enacted the Dodd-Frank Act,9 which, among other provisions, requires the Federal Reserve to conduct an annual supervisory stress test. The Dodd-Frank Act supervisory stress test applies to LISCC firms, large and complex firms,10 and large and noncomplex firms.11
In conducting the supervisory stress tests, the Federal Reserve projects balance sheets, RWAs, net income, and resulting post-stress capital levels and regulatory capital ratios over a nine-quarter planning horizon, generally using a set of capital action assumptions prescribed in the Dodd-Frank Act stress test rules (see Capital Action Assumptions and Regulatory Capital Ratios). The projections are based on three macroeconomic scenarios required by the Dodd-Frank Act (baseline, adverse, and severely adverse) and developed annually by the Federal Reserve.12
Together, the Dodd-Frank Act supervisory stress tests are intended to provide company management and boards of directors, the public, and supervisors with forward-looking information to help gauge the potential effect of stressful conditions on the ability of these large banking organizations to absorb losses, while meeting obligations to creditors and other counterparties and continuing to lend. The Dodd-Frank Act requires the Federal Reserve to disclose a summary of its supervisory stress test results. The Federal Reserve must publicly disclose supervisory stress test results by June 30 of the calendar year in which the stress test was conducted.
References
9. Pub. L. No. 111-203, 124 Stat. 1376 (2010). Return to text
10. The LISCC or large and complex firms required to participate in DFAST 2018 are Bank of America Corporation; The Bank of New York Mellon Corporation; Barclays US LLC; Capital One Financial Corporation; Citigroup Inc.; Credit Suisse Holdings (USA) LLC; Deutsche Bank USA Corp; The Goldman Sachs Group, Inc.; HSBC North America Holdings Inc.; JPMorgan Chase & Co.; Morgan Stanley; The PNC Financial Services Group, Inc.; RBC USA Holdco Corporation; State Street Corporation; TD Group US Holdings LLC; UBS Americas Holdings LLC; U.S. Bancorp; and Wells Fargo & Company. Return to text
11. The large and noncomplex firms participating in DFAST 2018 are Ally Financial Inc.; American Express Company; BB&T Corporation; BBVA Compass Bancshares, Inc.; BMO Financial Corp.; BNP Paribas USA, Inc.; Citizens Financial Group, Inc.; Discover Financial Services; Fifth Third Bancorp; Huntington Bancshares Incorporated; KeyCorp; M&T Bank Corporation; MUFG Americas Holdings Corporation; Northern Trust Corporation; Regions Financial Corporation; Santander Holdings USA, Inc.; and SunTrust Banks, Inc. Return to text
12. The Board has issued a policy statement regarding its process for designing the scenarios. See Policy Statement on the Scenario Design Framework for Stress Testing, 78 Fed. Reg. 71435 (November 29, 2013), www.gpo.gov/fdsys/pkg/FR-2013-11-29/pdf/2013-27009.pdf (12 CFR part 252, appendix A). Return to text