Proposed Amendments to the Stress Test Rule

Federal Register, Volume 84 Issue 241 (Monday, December 16, 2019)
[Federal Register Volume 84, Number 241 (Monday, December 16, 2019)]
[Proposed Rules]
[Pages 68350-68353]
From the Federal Register Online via the Government Publishing Office []
[FR Doc No: 2019-26950]
Proposed Rules
                                                Federal Register
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
Federal Register / Vol. 84, No. 241 / Monday, December 16, 2019 /
Proposed Rules
[[Page 68350]]
12 CFR Part 1238
RIN 2590-AB05
Proposed Amendments to the Stress Test Rule
AGENCY: Federal Housing Finance Agency.
ACTION: Notice of proposed rulemaking with request for comment.
SUMMARY: The Federal Housing Finance Agency (FHFA) is requesting
comment on a proposed rule that would amend its stress testing rule,
consistent with section 401 of the Economic Growth, Regulatory Relief,
and Consumer Protection Act (EGRRCPA). Specifically, the proposed rule
would revise the minimum threshold for the regulated entities to
conduct stress tests from $10 billion to $250 billion, remove the
requirements for Federal Home Loan Banks (Banks) subject to stress
testing, and remove the adverse scenario from the list of required
scenarios. These amendments align FHFA's rule with rules adopted by
other financial institution regulators that implement the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) stress
testing requirements, as amended by EGRRCPA. The proposed rule also
makes certain conforming and technical changes.
DATES: Comments on the proposed amendments must be received on or
before January 15, 2020.
ADDRESSES: You may submit your comments, identified by regulatory
identification number (RIN) 2590-AB05, by any of the following methods:
     Agency Website:
     Federal eRulemaking Portal:
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at [email protected] to ensure timely receipt by the agency.
Please include ``RIN 2590-AB05'' in the subject line of the message.
     Hand Delivered/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AB05,
Federal Housing Finance Agency, Eighth Floor, 400 Seventh Street SW,
Washington, DC 20219. Deliver the package to the Seventh Street
entrance Guard's Desk, First Floor, on business days between 9 a.m. and
5 p.m.
     U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AB05, Federal
Housing Finance Agency, Eighth Floor, 400 Seventh Street SW,
Washington, DC 20219. Please note that all mail sent to FHFA via U.S.
Mail is routed through a national irradiation facility, a process that
may delay delivery by approximately two weeks.
    See SUPPLEMENTARY INFORMATION for additional information on
submission and posting of comments.
Director, Office of Financial Analysis, Modeling and Simulations, (202)
649-3140, [email protected]; Karen Heidel, Assistant General
Counsel, Office of General Counsel, (202) 649-3073,
[email protected]; or Mark D. Laponsky, Deputy General Counsel,
Office of General Counsel, (202) 649-3054, [email protected]. The
telephone number for the Telecommunications Device for the Deaf is
(800) 877-8339.
I. Comments
    FHFA invites comment on all aspects of the proposed amendments and
will take all comments into consideration before adopting amendments
through a final rule. Copies of all comments received will be posted
without change on the FHFA website at, and will
include any personal information you provide, such as your name,
address, email address, and telephone number. In addition, copies of
all comments received will be available for examination by the public
through the electronic rulemaking docket for this proposed rule also
located on the FHFA website.
II. Background
    Section 401 of the EGRRCPA, (Pub. L. 115-174, section 401) amended
the Dodd-Frank Act requirements to implement stress testing. Prior to
the passage of the EGRRCPA,\1\ section 165(i) of the Dodd-Frank Act \2\
required each financial company with total consolidated assets of more
than $10 billion to conduct annual stress tests. In addition, section
165 required FHFA to issue regulations for regulated entities to
conduct their stress tests, which were required to include at least
three different stress testing scenarios: ``baseline,'' ``adverse,''
and ``severely adverse.'' \3\ In September 2013, FHFA published in the
Federal Register a final rule implementing the Dodd-Frank Act stress
testing requirements. FHFA's regulation, located at 12 CFR part 1238,
requires each regulated entity to conduct an annual stress test based
on scenarios provided by FHFA and consistent with FHFA prescribed
methodologies and practices. The regulation also requires that the
agency issue to the regulated entities stress test scenarios that are
generally consistent with and comparable to those developed by the FRB
not later than 30 days after the FRB publishes its scenarios.\4\
    \1\ Public Law 115-174, 132 Stat. 1296 (2018).
    \2\ Public Law 111-203, 124 Stat. 1376 (2010), codified at 12
U.S.C. 5365.
    \3\ 12 U.S.C. 5365(i)(2)(C).
    \4\ 12 CFR 1238.3(b).
    Section 401 of EGRRCPA amended certain aspects of the stress
testing requirements applicable to financial companies in section
165(i) of the Dodd-Frank Act.\5\ Specifically, after 18 months, section
401 of EGRRCPA raises the minimum asset threshold for application of
the stress testing requirement from $10 billion to $250 billion in
total consolidated assets, revises the requirement for financial
companies to conduct stress tests ``annually,'' and instead requires
them to conduct stress tests ``periodically'', and no longer requires
the stress test to include an ``adverse'' scenario, thus reducing the
number of required stress test scenarios from three to two.
    \5\ Public Law 115-174, 132 Stat. 1296-1368 (2018).
III. Analysis of Proposed Rule
    The purpose of this proposed rule is to revise FHFA's stress
testing rules applicable to its regulated entities,
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consistent with amendments made by section 401 of EGRRCPA. The proposed
rule would also make additional technical changes to the stress testing
rule. In sum, the proposed rule would discontinue the Dodd-Frank Act
stress testing of the Banks and reduce the number of scenarios mandated
for Enterprise Dodd-Frank Act stress testing.
A. Minimum Asset Threshold
    As described above, section 401 of EGRRCPA amended section 165 of
the Dodd-Frank Act by raising the minimum threshold for financial
companies required to conduct stress tests from $10 billion to $250
billion. As there are no Banks with total consolidated assets of over
$250 billion, the Banks will no longer be subject to the stress testing
requirements of this rule. Though each of the Banks has total
consolidated assets of less than $250 billion, the rule expressly
maintains the Director's discretion to require any regulated entity
with assets below the $250 billion threshold to conduct the stress
test. As the total consolidated assets for each Enterprise exceed the
$250 billion threshold, the Enterprises remain subject to stress
testing under this rule.
B. Frequency of Stress Testing
    Section 401 of EGRRCPA also revised the requirement under section
165 of the Dodd-Frank Act for financial companies to conduct stress
tests, changing the required frequency from ``annual'' to ``periodic.''
The term ``periodic'' is not defined in EGRRCPA. Because of the
Enterprises' total consolidated asset amounts, their function in the
mortgage market, size of their retained portfolios, and their share of
the mortgage securitization market, FHFA proposes to require the
Enterprises to conduct stress tests on an annual basis. This is
consistent with FHFA's regulatory mission to ensure each of the
regulated entities ``operates in a safe and sound manner.'' \6\
    \6\ 12 U.S.C. 4513(a)(1)(B).
C. Removal of the ``Adverse'' Scenario
    As discussed above, section 401 of EGRRCPA amended section 165(i)
of the Dodd-Frank Act to no longer require the Board to include an
``adverse'' stress-testing scenario, reducing the number of stress test
scenarios from three to two. The ``baseline'' scenario is a set of
conditions that affect the U.S. economy or the financial condition of
the regulated entities, and that reflect the consensus views of the
economic and financial outlook, and the ``severely adverse'' scenario
is a more severe set of conditions and the most stringent of the former
three scenarios. Although the ``adverse'' scenario has provided some
additional value in limited circumstances, the ``baseline'' and
``severely adverse'' scenarios largely cover the full range of expected
and stressful conditions. Therefore FHFA does not consider it
necessary, for its supervisory purposes, to require the additional
burden of analyzing an ``adverse'' scenario.
VI. Coordination With the FRB and the Federal Insurance Office
    In accordance with section 165(i)(2)(C), FHFA has coordinated with
both the FRB and the Federal Insurance Office (FIO). On November 29,
2018, the FRB published a proposed rule which revised ``the minimum
threshold for state member banks to conduct stress tests from $10
billion to $250 billion,'' and revised ``the frequency with which state
member banks with assets greater than $250 billion would be required to
conduct stress tests,'' in addition to removing the adverse scenario
from the list of required scenarios.\7\ The FDIC adopted its final
rule; \8\ and the OCC its final rule.\9\ Although FHFA's amended
proposed rule would not be identical to those of the FRB, the FDIC, and
the OCC, it is consistent and comparable with them. FHFA consulted with
the FRB and FIO before proposing these amendments.
    \7\ 83 FR 61408 (Nov. 29, 2018).
    \8\ 84 FR 56929 (Oct. 24, 2019).
    \9\ 84 FR 54472 (Oct. 10, 2019).
V. Paperwork Reduction Act
    The proposed rule does not contain any collections of information
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501, et
seq.). Therefore, FHFA has not submitted any information to the Office
of Management and Budget for review.
VI. Regulatory Flexibility Act
    The proposed rule applies only to the regulated entities, which do
not come within the meaning of small entities as defined in the
Regulatory Flexibility Act (see 5 U.S.C. 601(6)). Therefore, in
accordance with section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 605(b)), the General Counsel of FHFA certifies that this
proposed rule, if promulgated as a final rule, will not have a
significant economic impact on a substantial number of small entities.
List of Subjects in 12 CFR Part 1238
    Administrative practice and procedure, Capital, Federal Home Loan
Banks, Government-sponsored enterprises, Regulated entities, Reporting
and recordkeeping requirements, Stress test.
Authority and Issuance
    For the reasons stated in the SUPPLEMENTARY INFORMATION section,
and under the authority of 12 U.S.C. 5365(i), FHFA proposes to amend
part 1238 of Title 12 of the Code of Federal Regulations to read as
1. The authority citation for part 1238 continues to read as follows:
    Authority:  12 U.S.C. 1426; 4513; 4526; 4612; 5365(i).
2. Amend Sec.  1238.1 to read as follows:
Sec.  1238.1   Authority and Purpose.
    (a) Authority. This part is issued by the Federal Housing Finance
Agency (FHFA) under section 165(i) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act), Public Law 111-203, 124
Stat. 1376, 1423-32 (2010), 12 U.S.C. 5365(i), as amended by section
401 of the Economic Growth, Regulatory Relief, and Consumer Protection
Act (EGRRCPA), Public Law 115-174, 132 Stat. 1296 (2018), 12 U.S.C.
5365(i); and the Safety and Soundness Act (12 U.S.C. 4513, 4526, 4612).
    (b) Purpose. (1) This part implements section 165(i)(2) of the
Dodd-Frank Act, as amended by section 401 of the EGRRCPA, which
requires all large financial companies that have total consolidated
assets of more than $250 billion, and are regulated by a primary
federal financial regulatory agency, to conduct periodic stress tests.
    (2) This part establishes requirements that apply to each
Enterprise's performance of periodic stress tests. The purpose of the
periodic stress test is to provide the Enterprises, FHFA, and the FRB
with additional, forward-looking information that will help them to
assess capital adequacy at the Enterprises under various scenarios; to
review the Enterprises' stress test results; and to increase public
disclosure of the Enterprises' capital condition by requiring broad
dissemination of the stress test scenarios and results.
3. Amend Sec.  1238.2 to read as follows:
Sec.  1238.2   Definitions.
    For purposes of this part, the following definitions apply:
    Planning horizon means the period of time over which the stress
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must extend. The planning horizon cannot be less than nine quarters.
    Scenarios are sets of economic and financial conditions used in the
Enterprises' stress tests, including baseline and severely adverse.
    Stress test is a process to assess the potential impact on an
Enterprise of economic and financial conditions (``scenarios'') on the
consolidated earnings, losses, and capital of the Enterprise over a set
planning horizon, taking into account the current condition of the
Enterprise and the Enterprise's risks, exposures, strategies, and
4. Amend Sec.  1238.3 to read as follows:
Sec.  1238.3   Annual stress test.
    (a) In general. Each Enterprise:
    (1) Shall complete an annual stress test of itself based on its
data as of December 31 of the preceding calendar year;
    (2) The stress test shall be conducted in accordance with this
section and the methodologies and practices described in Sec.  1238.4
and in a supplemental guidance or order.
    (b) Scenarios provided by FHFA. In conducting its annual stress
tests under this section, each Enterprise must use scenarios provided
by FHFA, which shall be generally consistent with and comparable to
those established by the FRB, that reflect a minimum of two sets of
economic and financial conditions, including a baseline and severely
adverse scenario. Not later than 30 days after the FRB publishes its
scenarios, FHFA will issue to the Enterprises a description of the
baseline and severely adverse scenarios that each Enterprise shall use
to conduct its annual stress tests under this part.
 5. Amend Sec.  1238.4 to read as follows:
Sec.  1238.4   Methodologies and practices.
    (a) Potential impact. Except as noted in this subpart, in
conducting a stress test under Sec.  1238.3, each Enterprise shall
calculate how each of the following is affected during each quarter of
the stress test planning horizon, for each scenario:
    (1) Potential losses, pre-provision net revenues, and future pro
forma capital positions over the planning horizon; and
    (2) Capital levels and capital ratios, including regulatory capital
and net worth, and any capital ratios, specified by FHFA.
    (b) Planning horizon. Each Enterprise must use a planning horizon
of at least nine quarters over which the impact of specified scenarios
would be assessed.
    (c) Additional analytical techniques. If FHFA determines that the
stress test methodologies and practices of an Enterprise are deficient,
FHFA may determine that additional or alternative analytical techniques
and exercises are appropriate for an Enterprise to use in identifying,
measuring, and monitoring risks to the financial soundness of the
Enterprise, and require an Enterprise to implement such techniques and
exercises in order to fulfill the requirements of this part. In
addition, FHFA will issue guidance annually to describe the baseline
and severely adverse scenarios, and methodologies to be used in
conducting the annual stress test.
    (d) Controls and oversight of the stress testing processes. (1) The
appropriate senior management of each Enterprise must ensure that the
Enterprise establishes and maintains a system of controls, oversight,
and documentation, including policies and procedures, designed to
ensure that the stress testing processes used by the Enterprise are
effective in meeting the requirements of this part. These policies and
procedures must, at a minimum, describe the Enterprise's testing
practices and methodologies, validation and use of stress test results,
and processes for updating the Enterprise's stress testing practices
consistent with relevant supervisory guidance;
    (2) The board of directors, or a designated committee thereof,
shall review and approve the policies and procedures established to
comply with this part as frequently as economic conditions or the
condition of the Enterprise warrants, but at least annually; and
    (3) Senior management of the Enterprise and each member of the
board of directors shall receive a summary of the stress test results.
 6. Amend Sec.  1238.5 to read as follows:
Sec.  1238.5   Required report to FHFA and FRB of stress test results
and related information.
    (a) Report required for stress tests. On or before May 20 of each
year, the Enterprises must report the results of the stress tests
required under Sec.  1238.3 to FHFA, and to the FRB, in accordance with
paragraph (b) of this section;
    (b) Content of the report for annual stress test. Each Enterprise
must file a report in the manner and form established by FHFA.
    (c) Confidential treatment of information submitted. Reports
submitted to FHFA under this part are FHFA property and records (as
defined in 12 CFR part 1202 of this chapter). The reports are and
include non-public information contained in or related to examination,
operating, or condition reports prepared by, on behalf of, or for the
use of, FHFA in connection with the performance of the agency's
responsibilities regulating or supervising the Enterprises. Disclosure
of any reports submitted to FHFA or the information contained in any
such report is prohibited unless authorized by this part, legal
obligation, or otherwise by the Director of FHFA.
7. Amend Sec.  1238.6 to read as follows:
Sec.  1238.6  Post-assessment actions by the Enterprises.
    Each Enterprise shall take the results of the stress test conducted
under Sec.  1238.3 into account in making changes, as appropriate, to
the Enterprise's capital structure (including the level and composition
of capital); its exposures, concentrations, and risk positions; any
plans for recovery and resolution; and to improve overall risk
management. If an Enterprise is under FHFA conservatorship, any post-
assessment actions shall require prior FHFA approval.
8. Amend Sec.  1238.7 to read as follows:
Sec.  1238.7   Publication of results by regulated entities.
    (a) Public disclosure of results required for stress tests of the
Enterprises. The Enterprises must disclose publicly a summary of the
stress test results for the severely adverse scenario not earlier than
August 1 and not later than August 15 of each year. The summary may be
published on the Enterprise's website or in any other form that is
reasonably accessible to the public.
    (b) Information to be disclosed in the summary. The information
disclosed by each Enterprise shall, at minimum, include--
    (1) A description of the types of risks being included in the
stress test;
    (2) A high-level description of the scenario provided by FHFA,
including key variables (such as GDP, unemployment rate, housing
prices, and foreclosure rate, etc.);
    (3) A general description of the methodologies employed to estimate
losses, pre-provision net revenue, and changes in capital positions
over the planning horizon;
    (4) A general description of the use of the required stress test as
one element in an Enterprise's overall capital planning and capital
assessment. If an Enterprise is under conservatorship, this description
shall be coordinated with FHFA;
    (5) Aggregate losses, pre-provision net revenue, net income, net
worth, pro forma capital levels and capital ratios (including
regulatory and any other
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capital ratios specified by FHFA) over the planning horizon, under the
scenario; and
    (6) Such other data fields, in such form (e.g., aggregated), as the
Director may require.
    Dated: December 10, 2019.
Mark A. Calabria,
Director, Federal Housing Finance Agency.
[FR Doc. 2019-26950 Filed 12-13-19; 8:45 am]