WASHINGTON Federal regulators released proposed guidance on Tuesday designed to help medium-sized banks comply with company-run stress test requirements that kick in this fall.
Joining several other stress test commitments stemming from the crisis, the three bank regulators last year issued rules under the Dodd-Frank Act ordering banks with at least $10 billion in assets to conduct internal tests based on scenarios crafted by the agencies. All banks subject to the rules eventually must publish some of their results.
But the three agencies the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency in their respective rules chose to phase in compliance based on institution size. The rule was effective last fall for banks with over $50 billion in assets; those with between $10 billion and $50 billion in assets must begin complying this October.
On Monday, the three regulators proposed joint guidelines with their expectations for the smaller group. Under the proposed guidance, banks with between $10 and $50 billion in assets would evaluate their performance under three imagined scenarios: normal, adverse and "severely" adverse. All of an institution's business lines would have to be subjected to the test. In conducting a test, an institution could apply regional factors unique to its market.
"However, the paths of any additional regional or local variables that a company uses would be expected to be consistent with the path of the national variables in the supervisory scenarios," the regulators said in the proposed guidance.
The guidelines would also allow institutions to take a different approach to calculating net revenue under a scenario if they are less complex. While simpler institutions can essentially use basic components such as net interest income, non-interest income and non-interest expense, to calculate revenue, more sophisticated banks must use more advanced methods.
"Companies that are more complex or more sophisticated should consider methods that more fully capture potential risks to their business and strategy by collecting internal revenue data, estimating revenues within specific business lines, exploring more advanced techniques that identify the specific drivers of revenue, and analyzing how the supervisory scenarios affect those revenue drivers," the proposed guidance said.
Banks have until Sept. 25 to comment on the joint proposed guidance.