Stress Testing of Regulated Entities
| Published date | 24 March 2020 |
| Citation | 85 FR 16528 |
| Record Number | 2020-05476 |
| Section | Rules and Regulations |
| Court | Federal Housing Finance Agency |
Federal Register, Volume 85 Issue 57 (Tuesday, March 24, 2020)
[Federal Register Volume 85, Number 57 (Tuesday, March 24, 2020)]
[Rules and Regulations]
[Pages 16528-16531]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-05476]
=======================================================================
-----------------------------------------------------------------------
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1238
RIN 2590-AB05
Stress Testing of Regulated Entities
AGENCY: Federal Housing Finance Agency.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Federal Housing Finance Agency (FHFA) is adopting a final
rule that amends its stress testing rule, consistent with section 401
of the Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA). These amendments adopt the proposed amendments without
change to modify the minimum threshold for the regulated entities to
conduct stress tests increased from $10 billion to $250 billion;
removal of the requirements for Federal Home Loan Banks (Banks) subject
to stress testing; and removal of 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.
DATES: This rule is effective: March 24, 2020.
FOR FURTHER INFORMATION CONTACT: Naa Awaa Tagoe, Senior Associate
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.
SUPPLEMENTARY INFORMATION:
I. 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).
---------------------------------------------------------------------------
II. Discussion of Public Comments
On December 16, 2019, FHFA published in the Federal Register
proposed amendments to the stress testing requirements for the
regulated entities. The comment period closed on January 15, 2020. FHFA
received one comment which stated that the threshold of $250 billion in
total consolidated assets was too high and lowering the threshold to
$100 billion in total consolidated assets would be more appropriate.
EGRRCPA set the threshold at $250 billion in total consolidated assets
and the proposed rule reflects this statutory requirement. The
Enterprises will continue to be covered by the rule at its new
threshold, however, the Banks will not. After several years of
assessing the Banks' stress tests, FHFA believes that its other
supervision tools are sufficient for the agency's purposes, and that
the additional burden on the Banks of conducting the annual stress
tests is not necessary. FHFA retains under its general supervisory
powers the discretion to require stress testing by the Banks if FHFA
determines that it would be useful. Therefore, FHFA is adopting as its
final rule the same rule proposed on December 16, 2019, without any
change.
III. Summary of Final Rule
FHFA is adopting the proposed revisions to FHFA's rule without
change as follows: The rule discontinues the Dodd-Frank Act stress
testing of the Banks; prescribes the frequency of stress testing; and
reduces the number of scenarios mandated for Enterprise Dodd-Frank Act
stress testing. These revisions are described in more detail below.
A. Minimum Asset Threshold
As described above, section 401 of EGRRCPA amends 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. As the total consolidated assets for each
Enterprise exceed the $250 billion threshold, the Enterprises remain
subject to stress testing under this rule.
[[Page 16529]]
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 will continue 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 amends section 165(i) of
the Dodd-Frank Act to no longer require the FRB 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.
IV. 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 1,
2019, the FRB published a final 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 final rule is
not identical to those of the FRB, the FDIC, and the OCC, it is
consistent and comparable with them.
---------------------------------------------------------------------------
\7\ 84 FR 59032 (Nov. 1, 2019).
\8\ 84 FR 56929 (Oct. 24, 2019).
\9\ 84 FR 54472 (Oct. 10, 2019).
---------------------------------------------------------------------------
V. Paperwork Reduction Act
The final 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. Administrative Procedure Act
This final rule is effective immediately upon publication in the
Federal Register. Section 553(d)(3) of the Administrative Procedure Act
(APA) provides for a delayed effective date after publication of a
rule, except ``as otherwise provided by the agency for good cause found
and published with the rule.'' The changes to part 1238 primarily cover
how FHFA will implement the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) stress testing requirements, as amended
by section 401 of EGRRCPA. These amendments, applicable to large
financial companies, became effective on November 24, 2019. Consistent
with section 553(d)(3) and for the reasons discussed below, FHFA finds
good cause exists to publish this final rule with an immediate
effective date. Without this rule, the Enterprises and Federal Home
Loan Banks will be required to conduct stress testing under the prior
rule, incurring additional expense and burden which FHFA has determined
is not necessary for purposes of safety and soundness. In addition, an
immediate effective date permits FHFA to synchronize its supervisory
efforts related to stress testing with the FRB and the FDIC.
Accordingly, the FHFA finds good cause for the final rule to take
effect immediately upon publication in the Federal Register.
VII. Regulatory Flexibility Act
The final 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 final rule will not have a
significant economic impact on a substantial number of small entities.
VIII. Congressional Review Act
In accordance with the Congressional Review Act (5 U.S.C. 801 et
seq.), FHFA has determined that this final rule is not a major rule and
has verified this determination with the Office of Information and
Regulatory Affairs of the OMB.
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 preamble, and under the authority of
12 U.S.C. 5365(i), FHFA amends part 1238 of Title 12 of the Code of
Federal Regulations as follows:
PART 1238--STRESS TESTING OF REGULATED ENTITIES
0
1. The authority citation for part 1238 continues to read as follows:
Authority: 12 U.S.C. 1426, 4513, 4526, 4612; 5365(i).
0
2. Revise 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
[[Page 16530]]
disclosure of the Enterprises' capital condition by requiring broad
dissemination of the stress test scenarios and results.
0
3. Revise 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
projections 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
activities.
0
4. Revise 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.
0
5. Revise 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 other 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 Enterprises 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.
0
6. Revise 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). 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.
0
7. Revise 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.
0
8. Revise 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;
[[Page 16531]]
(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 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: March 11, 2020.
Mark A. Calabria,
Director, Federal Housing Finance Agency.
[FR Doc. 2020-05476 Filed 3-23-20; 8:45 am]
BILLING CODE 8070-01-P
