Recordkeeping

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charge off method of accounting for bad
debts. The information required by
§ 1.585–8 of the regulations identifies
any election made or revoked by the
taxpayer in accordance with § 585(c).
Affected Public: Private Sector:
Businesses or other for-profits.
Estimated Total Burden Hours: 625.
OMB Number: 1545–1514.
Type of Review: Extension without
change of a currently approved
collection.
Title: REG–209040–88 (NPRM),
Qualified Electing Fund Elections.
Abstract: The regulations permit
certain shareholders to make a special
section 1295 election with respect to
certain preferred shares of a PFIC.
Taxpayers must indicate the election on
a Form 8621 and attach a statement
containing certain information and
representations. Form 8621 must be
filed annually. The shareholder also
must obtain, and retain a copy of, a
statement from the corporation as to its
status as a PFIC.
Affected Public: Individuals or
Households.
Estimated Total Burden Hours: 600.
OMB Number: 1545–1954.
Type of Review: Extension without
change of a currently approved
collection.
Title: Health Coverage Tax Credit
Registration Update Form.
Form: 13704.
Abstract: Internal Revenue Code
Sections 35 and 7527 enacted by public
law 107–210 require the Internal
Revenue Service to provide payments of
the HCTC to eligible individuals
beginning August 1, 2003. The IRS will
use the Registration Update Form to
ensure, that the processes and
communications for delivering these
payments help taxpayers determine if
they are eligible for the credit and
understand what they need to do to
continue to receive it.
Affected Public: Individuals or
Households.
Estimated Total Burden Hours: 1,100.
Dawn D. Wolfgang,
Treasury PRA Clearance Officer.
[FR Doc. 2012–11935 Filed 5–16–12; 8:45 am]
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DEPARTMENT OF THE TREASURY
Submission for OMB Review;
Comment Request

DEPARTMENT OF THE TREASURY

Comments should be received on
or before June 18, 2012 to be assured of
consideration.

[Docket No. OCC–2012–0004]

DATES:

Send comments regarding
the burden estimate, or any other aspect
of the information collection, including
suggestion for reducing the burden, to
the (1) Office of Information and
Regulatory Affairs, Office of
Management and Budget, Attention:
Desk Officer for Treasury, New
Executive Office Building, Room 10235,
Washington, DC 20503, or email at
[email protected] and
to the (2) Treasury PRA Clearance
Officer, 1750 Pennsylvania Ave. NW.,
Suite 8140, Washington, DC 20220, or
on-line at www.PRAComment.gov.

ADDRESSES:

FOR FURTHER INFORMATION CONTACT:

Copies of the submission(s) may be
obtained by calling (202) 927–5331,
email at [email protected], or the entire
information collection request maybe
found at www.reginfo.gov.
Alcohol and Tobacco Tax and Trade
Bureau (TTB)
OMB Number: 1513–0103.
Type of Review: Revision a currently
approved collection.
Title: Tobacco Bond—Collateral,
Tobacco Bond—Surety, and Tobacco
Bond.
Form: TTB F 5200.25, 5200.26,
5200.29.
Abstract: TTB requires a corporate
surety bond or a collateral bond to
ensure payment of the excise tax on
tobacco products (TP) and cigarette
paper and tubes (CP&T) removed from
the factory or warehouse. These TTB
forms identify the agreement to pay and
the person from which TTB will attempt
to collect any unpaid excise tax.
Manufactures of TP or CP&T, export
warehouse proprietors, and corporate
sureties, if applicable, are the
respondents for these forms.
Affected Public: Private Sector:
Businesses or other for-profits.
Estimated Total Burden Hours: 111.
Dawn D. Wolfgang,
Treasury PRA Clearance Officer.

May 14, 2012.

[FR Doc. 2012–11985 Filed 5–16–12; 8:45 am]

The Department of the Treasury will
submit the following information
collection request to the Office of
Management and Budget (OMB) for

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with the Paperwork Reduction Act of
1995, Public Law 104–13, on or after the
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Office of the Comptroller of the
Currency

FEDERAL RESERVE SYSTEM
[Docket No. OP–1421]

FEDERAL DEPOSIT INSURANCE
CORPORATION
Supervisory Guidance on Stress
Testing for Banking Organizations
With More Than $10 Billion in Total
Consolidated Assets
Board of Governors of the
Federal Reserve System (‘‘Board’’ or
‘‘Federal Reserve’’); Federal Deposit
Insurance Corporation (‘‘FDIC’’); Office
of the Comptroller of the Currency,
Treasury (‘‘OCC’’).
ACTION: Final supervisory guidance.
AGENCY:

The Board, FDIC and OCC,
(collectively, the ‘‘agencies’’) are issuing
this guidance, which outlines high-level
principles for stress testing practices,
applicable to all Federal Reservesupervised, FDIC-supervised, and OCCsupervised banking organizations with
more than $10 billion in total
consolidated assets. The guidance
highlights the importance of stress
testing as an ongoing risk management
practice that supports a banking
organization’s forward-looking
assessment of its risks and better equips
the organization to address a range of
adverse outcomes.
DATES: This guidance will become
effective on July 23, 2012.
FOR FURTHER INFORMATION CONTACT:
Board: Constance M. Horsley,
Manager, Capital and Regulatory Policy
(202) 452–5239, David Palmer, Senior
Supervisory Analyst, Risk Section, (202)
452–2904, or Sean Healey, Financial
Analyst, Capital and Regulatory Policy,
(202) 912–4611, Division of Banking
Supervision and Regulation; or
Benjamin W. McDonough, Senior
Counsel, (202) 452–2036, Christine E.
Graham, Senior Attorney, (202) 452–
3005, or Dominic A. Labitzky, Senior
Attorney, (202) 452–3428, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551.
FDIC: George French, Deputy
Director, Policy, (202) 898–3929; Robert
Burns, Associate Director, Division of
Risk Management Supervision, (202)
898–3905; Karl Reitz, Senior Capital
Markets Specialist, (202) 898–6775,
Division of Risk Management
Supervision; or Mark Flanigan, Counsel,
SUMMARY:

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(202) 898–7426; Ryan Clougherty,
Senior Attorney, (202) 898–3843,
Supervision Branch, Legal Division,
Federal Deposit Insurance Corporation,
550 17th Street NW., Washington, DC
20429.
OCC: Darrin Benhart, Deputy
Comptroller, Credit and Market Risk,
(202) 874 1711, Robert Scavotto, Lead
International Expert, International
Analysis and Banking Condition (202)
874–4943, Tanya Smith, NBE, Lead
Expert for Regulatory Capital and
Operational Risk, Large Bank
Supervision (202) 874–4464, Akhtarur
Siddique, Deputy Director, Enterprise
Risk Analysis Division (202) 874–4665,
or Alexandra Arney, Attorney,
Legislative and Regulatory Activities
Division (202) 874–6104, Office of the
Comptroller of the Currency, 250 E
Street SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
I. Background
On June 15, 2011, the agencies
requested public comment on joint
proposed guidance on the use of stress
testing as an ongoing risk management
practice by banking organizations with
more than $10 billion in total
consolidated assets (the proposed
guidance).1 The public comment period
on the proposed guidance closed on July
29, 2011. The agencies are adopting the
guidance in final form with certain
modifications that are discussed below
(the final guidance). As described
below, this guidance does not apply to
banking organizations with consolidated
assets of $10 billion or less.
All banking organizations should
have the capacity to understand their
risks and the potential impact of
stressful events and circumstances on
their financial condition.2 The agencies
have previously highlighted the use of
stress testing as a means to better
understand the range of a banking
organization’s potential risk exposures.3
1 See

76 FR 35072 (June 15, 2011).
purposes of this guidance, the term
‘‘banking organization’’ means national banks,
federal savings associations, and federal branches
and agencies supervised by the OCC; state member
banks, bank holding companies, savings and loan
holding companies, and all other institutions for
which the Federal Reserve is the primary federal
supervisor; and state nonmember banks, and all
other institutions for which the FDIC is the primary
federal supervisor.
3 See, e.g., Supervision and Regulation Letter SR
10–6, OCC Bulletin 2010–13 or FDIC Financial
Institution Letter (FIL) 13–2010, Interagency Policy
Statement on Funding and Liquidity Risk
Management (March 17, 2010), available at http://
www.federalreserve.gov/boarddocs/srletters/2010/
sr1006.htm; Supervision and Regulation Letter SR
10–1, OCC Bulletin 2010–1 or FDIC FIL–2–2010,
Interagency Advisory on Interest Rate Risk (January
11, 2010), available at http://

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The 2007–2009 financial crisis further
underscored the need for banking
organizations to incorporate stress
testing into their risk management, as
banking organizations unprepared for
stressful events and circumstances can
suffer acute threats to their financial
condition and viability.4 The final
guidance is intended to be consistent
with sound industry practices and with
international supervisory standards.5
Building upon previously issued
supervisory guidance that discusses the
uses and merits of stress testing in
specific areas of risk management, the
final guidance provides principles that
a banking organization should follow
when conducting its stress testing
activities. The guidance outlines broad
principles for a satisfactory stress testing
framework and describes the manner in
which stress testing should be employed
as an integral component of risk
management that is applicable at
various levels of aggregation within a
banking organization and that
contributes to capital and liquidity
planning. While the guidance is not
intended to provide detailed
instructions for conducting stress testing
for any particular risk or business area,
www.federalreserve.gov/boarddocs/srletters/2010/
sr1001.htm; Supervision and Regulation Letter SR
09–4, Applying Supervisory Guidance and
Regulations on the Payment of Dividends, Stock
Redemptions, and Stock Repurchases at Bank
Holding Companies (revised March 27, 2009),
available at http://www.federalreserve.gov/
boarddocs/srletters/2009/SR0904.htm; Supervision
and Regulation Letter SR 07–1, OCC Bulletin 2006–
46 or FDIC FIL–104–2006, Interagency Guidance on
Concentrations in Commercial Real Estate (January
4, 2007), available at http://www.federalreserve.gov/
boarddocs/srletters/2007/SR0701.htm; Supervision
and Regulation Letter SR 01–4, OCC Bulletin 2001–
6 or FDIC FIL–9–2001, Subprime Lending (January
31, 2001), available at http://
www.federalreserve.gov/boarddocs/srletters/2001/
SR0104.htm; Supervision and Regulation Letter SR
99–18, Assessing Capital Adequacy in Relation to
Risk at Large Banking Organizations and Others
with Complex Risk Profiles (July 1, 1999), available
at http://www.federalreserve.gov/boarddocs/
srletters/1999/SR9918; Supervisory Guidance:
Supervisory Review Process of Capital Adequacy
(Pillar 2) Related to the Implementation of the Basel
II Advanced Capital Framework, 73 FR 44620 (July
31, 2008); The Supervisory Capital Assessment
Program: Overview of Results (May 7, 2009),
available at http://www.federalreserve.gov/
newsevents/press/bcreg/bcreg20090507a1.pdf;
Comprehensive Capital Analysis and Review:
Objectives and Overview (March 18, 2011),
available at http://www.federalreserve.gov/
newsevents/press/bcreg/bcreg20110318a1.pdf; and
12 CFR 225.8.
4 The Dodd-Frank Wall Street Reform and
Consumer Protection Act (Pub. L. 111–203, 124
Stat. 1376) requires financial organizations with
more than $10 billion in total consolidated assets
to conduct a stress test at least annually. See
generally 12 U.S.C. 5365(i)(2).
5 See Basel Committee on Banking Supervision,
Principles for Sound Stress Testing Practices and
Supervision (May 2009), available at http://
www.bis.org/publ/bcbs155.pdf.

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the guidance describes several types of
stress testing activities and how they
may be most appropriately used by
banking organizations subject to this
guidance.
The final guidance does not
implement the stress testing
requirements imposed by the DoddFrank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) on
financial companies regulated by the
OCC, FDIC, or Board with total
consolidated assets of more than $10
billion or by the Board’s capital plan
rule on U.S. bank holding companies
with total consolidated assets equal to
or greater than $50 billion.6 The DoddFrank Act’s stress testing requirements
are being implemented through separate
notices of proposed rulemaking by the
respective agencies.7 The Board issued
the final capital plan rule on November
22, 2011. In light of these recent
rulemaking efforts on stress testing, the
guidance provides banking
organizations with principles for
conducting their stress testing activities
to, among other things, ensure that those
activities are adequately integrated into
overall risk management.8 The agencies
expect such companies would follow
the principles set forth in the
guidance—as well as other relevant
supervisory guidance—when
conducting stress testing in accordance
with statutory or regulatory
requirements.9
II. Discussion of Comments on the
Proposed Guidance
The agencies received 17 comment
letters on the proposed guidance.
Commenters included financial trade
associations, bank holding companies,
financial advisory firms, and
individuals. Commenters generally
expressed support for the proposed
guidance. However, several commenters
recommended changes to, or
clarification of, certain provisions of the
proposed guidance, as discussed below.
In response to these comments, the
agencies have clarified the principles set
forth in the guidance and modified the
proposed guidance in certain respects as
described in this section.
6 See

12 CFR 225.8.
Enhanced Prudential Standards and Early
Remediation Requirements for Covered Companies,
77 FR 594 (Jan. 5, 2012) (Board); Annual Stress
Test, 77 FR 3408 (Jan. 24, 2012) (OCC); Annual
Stress Test, 77 FR 3166 (Jan. 23, 2012) (FDIC).
8 As described below, the agencies believe that
$10 billion is the appropriate threshold based on
the general complexity of firms above this size.
9 To the extent that the guidance conflicts with
the requirements imposed with respect to any
future statutory or regulatory stress test, banking
organizations must comply with the requirements
set forth in the relevant statute or regulation.
7 See

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A. Scope of Application
The proposed guidance would have
applied to all banking organizations
supervised by the agencies with more
than $10 billion in total consolidated
assets. Specifically, with respect to the
OCC, these banking organizations would
have included national banking
associations and federal branches and
agencies; with respect to the Board,
these banking organizations would have
included state member banks, bank
holding companies, and all other
institutions for which the Board is the
primary federal supervisor; with respect
to the FDIC, these banking organizations
would have included state nonmember
banks and all other institutions for
which the FDIC is the primary federal
supervisor. The proposed guidance
indicated that a banking organization
should develop and implement its stress
testing framework in a manner
commensurate with its size, complexity,
business activities, and overall risk
profile.
Some commenters supported the total
consolidated asset threshold (i.e., more
than $10 billion), but others noted the
importance and value of stress testing
for smaller banking organizations.
Consistent with the proposed guidance,
no supervised banking organization
with $10 billion or less in total
consolidated assets is subject to this
final guidance. The agencies believe that
$10 billion is the appropriate threshold
for the guidance based on the general
complexity of firms above this size.
However, the agencies note that
previously issued supervisory guidance
applicable to all supervised institutions
discusses the use of stress testing as a
tool in certain aspects of risk
management—such as for commercial
real estate concentrations, liquidity risk
management, and interest-rate risk
management. The agencies received two
comments suggesting that the $10
billion total consolidated asset
threshold be measured over a fourquarter period in order to minimize the
likelihood that temporary asset
fluctuations would trigger application of
the guidance. The agencies do not
establish an asset calculation
methodology in the final guidance;
however, banking organizations with
assets near the threshold should use
reasonable judgment and consider, in
conjunction with their primary federal
supervisor as appropriate, whether they
should consider preparing to follow the
guidance.
Three commenters expressed concern
that foreign banking organizations
(FBOs) are required to follow stress
testing guidelines established by their

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home country supervisors and suggested
that the agencies give consideration to
those requirements. When developing
the guidance, the agencies sought to
ensure that it would not introduce
inconsistencies with internationally
agreed supervisory standards. The
agencies recognize that an FBO’s U.S.
operations are part of the FBO’s global
enterprise subject to requirements of its
home country. The agencies provided
sufficient flexibility in the proposed
guidance so that the guidance could
apply to various types of organizations.
In this final guidance, the agencies
clarify that certain aspects of the
guidance may not apply to U.S.
branches and agencies of FBOs (such as
the portions related to capital stress
testing) or may apply differently (such
as portions related to governance and
controls). Supervisors will take these
issues into consideration when
evaluating the ability of U.S. offices of
FBOs to meet the principles in the
guidance.
Two commenters expressed concern
regarding the application of the
proposed guidance to savings and loan
holding companies (SLHCs). They
suggested that the Board issue separate
guidance for SLHCs, as these
institutions would face a different set of
stress testing assumptions and scenarios
than banking organizations. The Board
believes that the guidance is instructive
to SLHCs to the same degree it is for
bank holding companies. The Federal
Reserve became the primary federal
supervisor for SLHCs on July 21, 2011,
after the agencies published the
proposed guidance for public comment
but before the end of the comment
period. While the Board recognizes that
certain differences do exist between
bank holding companies and SLHCs, the
Board believes the guidance contains
flexibility adequate to accommodate the
variations in size, complexity, business
activities, and overall risk profile of all
banking organizations that meet the
asset threshold. Thus, the guidance
anticipates that each banking
organization, including each SLHC,
would implement stress testing in a
manner consistent with its own
business and risk profile.10
Similarly, one commenter advocated
that the OCC propose separate guidance
on stress testing specifically tailored to
savings associations. The OCC became
the primary federal supervisor for
federal savings associations on July 21,
2011. While the OCC recognizes that
10 See Supervision and Regulation Letter SR 11–
11, Supervision of Savings and Loan Holding
Companies (SLHCs) (July 21, 2011), available at
http://www.federalreserve.gov/bankinforeg/
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certain differences do exist between
national banks and federal savings
associations, the OCC notes that the
final guidance contains flexibility
adequate to accommodate the variations
in size, complexity, business activities,
and overall risk profile of all banking
organizations that meet the asset
threshold. Thus, it is also expected that
each federal savings association would
implement the guidance consistent with
its own business and risk profile.
Several commenters requested
clarification on the linkage between the
stress testing guidance and the stress
testing requirements in the Dodd-Frank
Act. In devising the guidance, the
agencies endeavored to ensure that the
proposed and final guidance is
consistent with the stress testing
requirements under the Dodd-Frank Act
and believe that the principles set forth
in the final guidance are useful when
conducting the stress tests required
under the Act. Notably, the final
guidance was framed broadly to inform
a banking organization’s use of stress
testing in overall risk management, not
just stress tests required under the
Dodd-Frank Act. Dodd-Frank stress tests
would generally be considered part of
an organization’s overall stress testing
framework as described in the stress
testing guidance.11
B. Stress Testing Principles
As noted above, the proposed
guidance identified and included a
discussion of four key principles for a
banking organization’s stress testing
framework and related stress test
results, namely that: (1) A banking
organization’s stress testing framework
should include activities and exercises
that are tailored to and sufficiently
capture the banking organization’s
exposures, activities, and risks; (2) an
effective stress testing framework
employs multiple conceptually sound
stress testing activities and approaches;
(3) an effective stress testing framework
is forward-looking and flexible; and (4)
stress test results should be clear,
actionable, well supported, and inform
decision-making. In the final guidance,
the agencies have incorporated a fifth
principle specifying that an
organization’s stress testing framework
should include strong governance and
effective internal controls. The elements
of the fifth principle had been set forth
in section VI of the proposed guidance,
and the fifth principle does not expand
on this aspect of the proposed guidance.
Rather, the agencies reorganized this
discussion into a fifth principle in order
to underscore the importance of
11 See

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Federal Register / Vol. 77, No. 96 / Thursday, May 17, 2012 / Notices
governance and controls as a key
element in a banking organization’s
stress testing framework.
As noted above, commenters were
supportive of the principles-based
approach and the notion that a banking
organization’s stress testing framework
should be implemented in a manner
commensurate with factors such as the
complexity and size of the organization.
With more specific regard to the
proposed principles, commenters
suggested that the final guidance
address the standardization of stress
testing through the inclusion of
common coefficients, models, or
benchmarks. These commenters
expressed concerns that banking
organizations would implement the
principles inconsistently and that
standardization would help regulators
conduct comparative analyses across
firms. Another commenter suggested
that the agencies prescribe more
detailed and integrated stress testing
between different entities or business
units within an organization.
The agencies did not modify the
guidance in response to these
comments. A key aspect of the guidance
is to provide organizations flexibility on
how they design their individual stress
testing frameworks. Thus, each banking
organization should design a specific
stress testing framework to capture risks
relevant to the organization. The
agencies believe that prescribing
standardized stress tests in this
guidance would have its own inherent
limitations and may not appropriately
cover a banking organization’s material
risks and activities.
In addition, commenters suggested
that the agencies mandate public release
of stress testing results through the
guidance. The agencies have considered
these comments, but do not believe the
final guidance is the appropriate place
for such a requirement given its broader
focus on banking organizations’ overall
stress testing frameworks. The agencies
note, however, that banking
organizations may be required to
disclose information about their stress
tests pursuant to other statutory,
regulatory, or supervisory requirements.
A few commenters stated that a
banking organization should explain
and justify the stress testing
methodologies it utilizes to its primary
federal supervisor. The agencies note
that supervisors will examine firms’
stress testing methodologies through the
supervisory process. One commenter
noted that the guidance should
explicitly indicate that liabilities should
be part of a banking organization’s stress
testing activities; the agencies intended
that stress testing activities would take

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an organization’s liabilities into account
and have clarified this in the final
guidance. Three commenters suggested
that operational risk be specifically
referenced in the guidance. In response,
the agencies have clarified in the final
guidance that operational risk should be
among the risks considered by an
organization’s stress testing framework.
Another commenter expressed
concern that the frequency of stress
testing and communication of results
might eventually desensitize senior
management to them. The agencies
believe that regular review of stress test
results is useful—both during periods of
economic downturn and benign
periods—and have clarified that such
review can help a banking organization
track over time the impact of ongoing
business activities, changes in
exposures, varying economic
conditions, and market movements on
its financial condition. Aside from the
inclusion of a fifth principle as
described above, the agencies have
otherwise adopted the proposed
principles in the final guidance with
only minor additional refinements.
C. Stress Testing Approaches and
Applications
The proposed guidance described
certain stress testing approaches and
applications—scenario analysis,
sensitivity analysis, enterprise-wide
testing, and reverse stress testing—that
a banking organization could consider
using within its stress testing
framework, as appropriate. The
proposed guidance provided that each
banking organization should apply these
approaches and applications
commensurate with its size, complexity,
and business profile, and may not need
to incorporate all of the details
described in the guidance.
Some commenters questioned the
appropriate number and types of stress
test approaches an organization should
utilize. The agencies do not believe that
specifying a number or particular types
of approaches—including the number of
scenarios—is appropriate in the
guidance given the wide range of stress
testing activities that different banking
organizations may undertake. A banking
organization should choose the
approaches that appropriately consider
the unique characteristics of that
particular organization and the relevant
risks it faces. The agencies expect that
stress testing methodologies will evolve
over time as banking organizations
develop approaches that best capture
their individual risk profiles.
In addition, the proposed guidance
described reverse stress testing as a tool
that would allow a banking organization

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to assume a known adverse outcome,
such as suffering a credit loss that
causes it to breach a minimum
regulatory capital ratio or suffering
severe liquidity constraints making it
unable to meet its obligations, and then
deduce the types of events that could
lead to such an outcome. This type of
stress testing may help a banking
organization to consider scenarios
beyond its normal business expectations
and see the impact of severe systemic
effects on the banking organization. It
also would allow a banking organization
to challenge common assumptions
about its performance and expected
mitigation strategies.
Three commenters expressed doubts
regarding the effectiveness of reverse
stress testing, as the approach could
produce results of questionable value
and captures unlikely, ‘‘extreme’’
scenarios. The agencies reiterate the
value of reverse stress testing, as it helps
a banking organization evaluate the
combined effect of several types of
extreme events and circumstances that
might threaten the survival of the
banking organization, even if in
isolation each of the effects might be
manageable. Another commenter
expressed concern that the results of
severe scenarios used for reverse stress
testing would directly lead to a
supervisory requirement to raise capital
if the results of the approach were
unfavorable to the organization. In
addition, some commenters sought
clarification that results would not be
used by regulators to criticize banking
organizations.
As stated in the proposed guidance, a
given stress test result will not
necessarily lead to immediate action by
a firm, and in some cases stress test
results—including those from reverse
stress tests—are most useful for the
additional information they provide. In
terms of supervisory responses to an
organization’s stress testing activities,
the agencies expect to consider a
banking organization’s stress test results
and the appropriateness of its overall
stress testing framework, along with all
other relevant information, in assessing
a banking organization’s risk
management practices, as well as its
capital and liquidity adequacy. The
guidance sets forth supervisory
expectations for prudent risk
management practices and a firm’s
decision not to follow the principles in
this guidance will be examined as part
of the supervisory process and may be
cited as evidence of unsafe and unsound
practices.

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E. Governance and Controls

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D. Stress Testing For Assessing
Adequacy of Capital and Liquidity
Given the importance of capital and
liquidity to a banking organization’s
viability, stress testing should be
applied to these two areas on a regular
basis. Stress testing for capital and
liquidity adequacy should be conducted
in coordination with a banking
organization’s overall business strategy
and annual planning cycles. Results
should be refreshed in the event of
major strategic decisions, or other
changes that can materially impact
capital or liquidity.
An effective stress testing framework
should explore the potential for capital
and liquidity problems to arise at the
same time or exacerbate one another. A
banking organization’s liquidity stress
analysis should explore situations in
which the banking organization may be
operating with a capital position that
exceeds regulatory minimums, but is
nonetheless viewed within the financial
markets or by its counterparties as being
of questionable viability. For its capital
and liquidity stress tests, a banking
organization should articulate clearly its
objectives for a post-stress outcome, for
instance to remain a viable financial
market participant that is able to meet
its existing and prospective obligations
and commitments.
In response to comments received on
the planning horizon for stress tests, the
agencies clarified that while capital
stress tests should generally be
conducted with a horizon of at least two
years, organizations should recognize
that the effects of certain stress
conditions could extend beyond that
horizon. The agencies have also
clarified, in response to comments, that
consolidated stress tests should account
for the fact that certain legal entities
within the consolidated organization are
required to meet regulatory capital
requirements.
A commenter requested clarification
on whether capital and liquidity stress
testing should be evaluated in unified or
separate stress tests. The proposed
guidance did not specify the precise
manner in which capital and liquidity
stress tests should be performed. The
final guidance notes that assessing the
potential interaction of capital and
liquidity can be challenging and may
not be possible within a single stress
test, so a banking organization should
explore several avenues to assess that
interaction. In any case, the agencies
believe that stress testing for both
liquidity and capital adequacy should
be an integral part of a banking
organization’s stress testing framework.

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As noted under the new fifth
principle of the final guidance, a
banking organization’s stress testing
framework will be effective only if it is
subject to strong governance and
controls to ensure that the framework
functions as intended. Strong
governance and controls also help
ensure that the framework contains core
elements, from clearly defined stress
testing objectives to recommended
actions. Importantly, strong governance
provides critical review of elements of
the stress testing framework, especially
regarding key assumptions,
uncertainties, and limitations. A
banking organization should ensure that
the stress testing framework is not
isolated within a banking organization’s
risk management function, but is firmly
integrated into business lines, capital
and asset-liability committees, and other
decision-making bodies.
As part of their overall
responsibilities, a banking
organization’s board and senior
management should establish a
comprehensive, integrated and effective
stress testing framework that fits into
the broader risk management of the
banking organization. Stress testing
results should be used to inform the
board about alignment of the banking
organization’s risk profile with the
board’s chosen risk appetite, as well as
inform operating and strategic
decisions. Stress testing results should
be considered directly by the board and
senior management for decisions
relating to capital and liquidity
adequacy. Senior management, in
consultation with the board, should
ensure that the stress testing framework
includes a sufficient range of stress
testing activities applied at the
appropriate levels of the banking
organization (i.e., not just one
enterprise-wide stress test).
Several commenters raised concerns
regarding the proposed responsibilities
of a banking organization’s board of
directors with respect to stress tests and
the framework. One commenter
believed that the board of directors
should not review all stress test results,
but rather only those that were expected
to have a material impact on the overall
organization. Another commenter
expressed the belief that the board of
directors should be involved in
providing direction and oversight
regarding the banking organization’s
stress testing framework, but that the
board of directors should not be
expected to be involved directly in more
operational aspects of the framework.

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The agencies have modified the final
guidance to clarify that senior
management, not the board of directors,
should have the primary responsibility
for stress testing implementation and
technical design. However, the agencies
emphasize that a banking organization’s
board of directors should be provided
with information from senior
management on stress testing
developments (including the process to
design tests and develop scenarios) and
on stress testing results (including from
individual tests, where material). As a
general matter, the board of directors is
also responsible for monitoring
effectiveness of the overall framework,
and using the results to inform their
decision-making process.
In addition, the final guidance
specifies that senior management
should, in consultation with the board
of directors, review stress testing
activities and results with an
appropriately critical eye to ensure that
there is objective review and that the
stress testing framework includes a
sufficient range of stress testing
activities applied at the appropriate
levels of the banking organization.
Finally, in response to comments, the
agencies have clarified that a banking
organization’s minimum annual review
and assessment of the effectiveness of
their stress testing framework should
ensure that stress testing coverage is
comprehensive, tests are relevant and
current, methodologies are sound, and
results are properly considered.
IV. Administrative Law Matters
A. Paperwork Reduction Act Analysis
In accordance with the Paperwork
Reduction Act (‘‘PRA’’) of 1995 (44
U.S.C. 3506; 5 CFR Part 1320 Appendix
A.1), the agencies reviewed the final
guidance. The agencies may not conduct
or sponsor, and an organization is not
required to respond to, an information
collection unless the information
collection displays a currently valid
OMB control number. While the
guidance is not being adopted as a rule,
the agencies determined that certain
aspects of the guidance may constitute
a collection of information and,
therefore, believed it was helpful to
publish a burden estimate with the
guidance. In particular, the aspects of
the guidance that may constitute an
information collection are the
provisions that state a banking
organization should (i) have a stress
testing framework that includes clearly
defined objectives, well-designed
scenarios tailored to the banking
organization’s business and risks, welldocumented assumptions, conceptually

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sound methodologies to assess potential
impact on the banking organization’s
financial condition, informative
management reports, and recommended
actions based on stress test results; and
(ii) have policies and procedures for a
stress testing framework. The agencies
estimated that the above-described
information collections included in the
guidance would take respondents, on
average, 260 hours each year. The
frequency of information collection is
estimated to be annual. Respondents are
banking organizations with more than
$10 billion in total consolidated assets,
as defined in the guidance.
The agencies received three comment
letters regarding the paperwork burden
of the guidance, stating that
implementation will require a multiple
of the 260 estimated hours. The agencies
emphasize that the guidance does not
implement the stress testing
requirements imposed by the DoddFrank Act 12 or the Board’s capital plan
rule,13 and does not otherwise impose
mandatory stress testing requirements.
The burden of information collections
associated with mandatory stress tests
will be accounted for in the respective
rules that implement those
requirements. In addition, the agencies
believe that in some respects, the
information collection elements of this
guidance augment certain expectations
that already are in place relative to
certain existing supervisory guidance.
The burden estimates for this guidance
take into consideration only those
collections of information, such as
documentation of policies and
procedures and relevant reports, that are
specific to this guidance. Based on these
factors, the agencies believe the burden
estimates included in the proposed
guidance continue to be appropriate.
Title: Recordkeeping and Disclosure
Provisions Associated with Stress
Testing Guidance.
Frequency of Response: Annual.
Affected Public: Banking
organizations with more than $10
billion in total consolidated assets.
OCC:
OMB Control No: To be assigned by
OMB.
Estimated Number of Respondents:
62.
Estimated Time per Response: 260
hours.
Estimated Total Annual Burden
Hours: 16,120 hours
Board:
Agency Information Collection
Number: FR 4202.
12 77

FR 594 (January 5, 2012).
Y–13; OMB No. 7100–0342).

13 (Reg

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OMB Control No: To be assigned by
OMB.
Estimated Number of Respondents:
154.
Estimated Time per Response: 260
hours.
Estimated Total Annual Burden
Hours: 40,040 hours.
FDIC:
OMB Control No: To be assigned by
OMB.
Estimated Number of Respondents:
25.
Estimated Time per Response: 260
hours.
Estimated Total Annual Burden
Hours: 6500 hours.
OCC: For purposes of the PRA, this
information collection will be titled
Recordkeeping and Disclosure
Provisions Associated with Stress
Testing Guidance.
This information collection is
authorized pursuant to the National
Bank Act, (12 U.S.C. 1 et seq.; 12 U.S.C.
161) and the International Banking Act
(12 U.S.C. 3101 et seq.). The OCC
expects to review the policies and
procedures for stress testing as part of
its supervisory process. To the extent
the OCC collects information during an
examination of a banking organization,
confidential treatment may be afforded
to the records under exemption 8 of the
Freedom of Information Act (‘‘FOIA’’),
5 U.S.C. 552(b)(8).
Board: For purposes of the PRA, this
information collection will be titled
Recordkeeping and Disclosure
Provisions Associated With Stress
Testing Guidance. The agency form
number for the collection is FR 4202.
The agency control number for this new
collection will be assigned by OMB.
This information collection is
authorized pursuant to sections 11(a),
11(i), 25, and 25A of the Federal Reserve
Act (12 U.S.C. 248(a), 248(i), 602, and
611), section 5 of the Bank Holding
Company Act (12 U.S.C. 1844), and
section 7(c) of the International Banking
Act (12 U.S.C. 3105(c)). The Board
expects to review the policies and
procedures for stress testing as part of
the Board’s supervisory process. To the
extent the Board collects information
during an examination of a banking
organization, the confidentiality of any
such information submitted to the Board
will be determined in accordance with
the Freedom of Information Act
(5 U.S.C. 552(b)(8)) Board’s Rules
Regarding Availability of Information
(12 CFR part 261).
FDIC: For purposes of the PRA, this
information collection will be titled
Recordkeeping and Disclosure
Provisions Associated With Stress
Testing Guidance.

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This information collection is
authorized pursuant to the Federal
Deposit Insurance Act, (12 U.S.C. 1811
et seq.) and the International Banking
Act (12 U.S.C. 3101 et seq.). The FDIC
expects to review the policies and
procedures for stress testing as part of
its supervisory process. To the extent
the FDIC collects information during an
examination of a banking organization,
confidential treatment may be afforded
to the records under exemption 8 of the
Freedom of Information Act (‘‘FOIA’’),
5 U.S.C. 552(b)(8).)
The agencies have a continuing
interest in the public’s opinions of
collections of information. At any time,
comments regarding the burden
estimate, or any other aspect of this
collection of information, including
suggestions for reducing the burden,
may be sent to: Communications
Division, Office of the Comptroller of
the Currency, Mailstop 2–3, Attention:
1557–NEW, 250 E Street SW.,
Washington, DC 20219, by electronic
mail to [email protected], or
by fax to (202) 874–5274; Secretary,
Board of Governors of the Federal
Reserve System, 20th and C Streets
NW., Washington, DC 20551; Executive
Secretary, Attention: Comments, FDIC,
550 17th Street NW., Washington, DC
20429; and to the Office of Management
and Budget, New Executive Office
Building, Washington, DC 20503.
B. Regulatory Flexibility Act Analysis
Board:
While the guidance is not being
adopted as a rule, the Board has
considered the potential impact of the
guidance on small banking
organizations in accordance with the
Regulatory Flexibility Act (5 U.S.C.
603(b)). Based on its analysis and for the
reasons stated below, the Board believes
that the final guidance will not have a
significant economic impact on a
substantial number of small entities.
Nevertheless, the Board is publishing a
regulatory flexibility analysis.
For the reason discussed in the
Supplementary Information above, the
Board is issuing the guidance to
emphasize the importance of stress
testing as an ongoing risk management
practice to support a banking
organization’s forward-looking
assessment of risks in order to better
equip such organization to address a
range of adverse outcomes. The
guidance provides broad principles a
banking organization should follow in
conducting its stress testing activities,
such as ensuring that those activities fit
into the organization’s overall risk
management program. The guidance
outlines broad principles for a

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satisfactory stress testing framework,
and describes the manner in which a
banking organization should employ
stress testing as an integral component
of risk management.
Under regulations issued by the Small
Business Administration (‘‘SBA’’), a
small banking organization is defined as
a banking organization with total assets
of $175 million or less. See 13 CFR
121.201. The final guidance applies to
banking organizations supervised by the
agencies with more than $10 billion in
total consolidated assets, including state
member banks, bank holding
companies, savings and loan holding
companies, and U.S. branches and
agencies of foreign banking
organizations. Banking organizations
that are subject to the guidance therefore
substantially exceed the $175 million
total asset threshold at which a banking
organization is considered a small
banking organization under SBA
regulations. In light of the foregoing, the
Board does not believe that the guidance
has a significant economic impact on a
substantial number of small entities.
V. Final Supervisory Guidance
The text of the final supervisory
guidance is as follows:
Office of the Comptroller of the
Currency
Federal Reserve System
Federal Deposit Insurance Corporation
Guidance on Stress Testing for Banking
Organizations With Total Consolidated
Assets of More Than $10 Billion

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I. Introduction
All banking organizations should
have the capacity to understand fully
their risks and the potential impact of
stressful events and circumstances on
their financial condition. The U.S.
federal banking agencies have
previously highlighted the use of stress
testing as a means to better understand
the range of a banking organization’s
potential risk exposures.1 The 2007–
1 See, e.g., Supervision and Regulation Letter SR
10–6, OCC Bulletin 2010–13 or FDIC Financial
Institution Letter (FIL) 13–2010, Interagency Policy
Statement on Funding and Liquidity Risk
Management (March 17, 2010), available at http://
www.federalreserve.gov/boarddocs/srletters/2010/
sr1006.htm (hereinafter Funding and Liquidity Risk
Management Policy Statement); Supervision and
Regulation Letter SR 10–1, OCC Bulletin 2010–1 or
FDIC FIL–2–2010, Interagency Advisory on Interest
Rate Risk (January 11, 2010), available at http://
www.federalreserve.gov/boarddocs/srletters/2010/
sr1001.htm (hereinafter Interest Rate Risk
Advisory); Supervision and Regulation Letter SR
09–4, Applying Supervisory Guidance and
Regulations on the Payment of Dividends, Stock
Redemptions, and Stock Repurchases at Bank
Holding Companies (revised March 27, 2009),
available at http://www.federalreserve.gov/

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2009 financial crisis underscored the
need for banking organizations to
incorporate stress testing into their risk
management practices, demonstrating
that banking organizations unprepared
for stressful events and circumstances
can suffer acute threats to their financial
condition and viability.2 The Federal
Reserve, the Office of the Comptroller of
the Currency, and the Federal Deposit
Insurance Corporation (collectively, the
‘‘agencies’’) are issuing this guidance to
emphasize the importance of stress
testing as an ongoing risk management
practice that supports banking
organizations’ forward-looking
assessment of risks and better equips
them to address a range of adverse
outcomes.
This joint guidance is applicable to all
institutions supervised by the agencies
with more than $10 billion in total
consolidated assets. Specifically, with
respect to the OCC, these banking
organizations include national banking
associations, federal savings
associations, and federal branches and
agencies; with respect to the Board,
these banking organizations include
state member banks, bank holding
companies, savings and loan holding
companies, and all other institutions for
which the Federal Reserve is the
primary federal supervisor; with respect
to the FDIC, these banking organizations
include state nonmember banks, state
boarddocs/srletters/2009/SR0904.htm (hereinafter
SR 09–04); Supervision and Regulation Letter SR
07–1, OCC Bulletin 2006–46 or FDIC FIL–104–2006,
Interagency Guidance on Concentrations in
Commercial Real Estate (January 4, 2007), available
at http://www.federalreserve.gov/boarddocs/
srletters/2007/SR0701.htm; Supervision and
Regulation Letter SR 01–4, OCC Bulletin 2001–6 or
FDIC FIL–9–2001, Subprime Lending (January 31,
2001), available at http://www.federalreserve.gov/
boarddocs/srletters/2001/SR0104.htm; Supervision
and Regulation Letter SR 99–18, Assessing Capital
Adequacy in Relation to Risk at Large Banking
Organizations and Others with Complex Risk
Profiles (July 1, 1999), available at http://
www.federalreserve.gov/boarddocs/srletters/1999/
SR9918 (hereinafter SR 99–18); Supervisory
Guidance: Supervisory Review Process of Capital
Adequacy (Pillar 2) Related to the Implementation
of the Basel II Advanced Capital Framework, 73 FR
44620 (July 31, 2008) (hereinafter Supervisory
Review Process of Capital Adequacy); The
Supervisory Capital Assessment Program: Overview
of Results (May 7, 2009), available at http://
www.federalreserve.gov/newsevents/press/bcreg/
bcreg20090507a1.pdf; Comprehensive Capital
Analysis and Review: Objectives and Overview
(March 18, 2011), available at http://
www.federalreserve.gov/newsevents/press/bcreg/
bcreg20110318a1.pdf; and 12 CFR 225.8.
2 The Dodd-Frank Wall Street Reform and
Consumer Protection Act (Pub. L. 111–203, 124
Stat. 1376) requires financial organizations with
more than $10 billion in total consolidated assets
to conduct a stress test at least annually. See
generally 12 U.S.C. 5365(i)(2).

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savings associations and insured
branches of foreign banks.3
The guidance does not apply to any
supervised institution below the
designated asset threshold. Certain other
existing supervisory guidance that
applies to all supervised institutions
discusses the use of stress testing as a
tool in certain aspects of risk
management, such as for commercial
real estate concentrations, liquidity risk
management, and interest-rate risk
management. However, no institution at
or below $10 billion in total
consolidated assets is subject to this
final guidance.
Building upon previously issued
supervisory guidance that discusses the
uses and merits of stress testing in
specific areas of risk management, this
guidance provides broad principles a
banking organization should follow in
conducting its stress testing activities,
such as ensuring that those activities fit
into the organization’s overall risk
management program. The guidance
outlines broad principles for a
satisfactory stress testing framework and
describes the manner in which stress
testing should be employed as an
integral component of risk management
that is applicable at various levels of
aggregation within a banking
organization, as well as for contributing
to capital and liquidity planning.4
While the guidance is not intended to
provide detailed instructions for
conducting stress testing for any
particular risk or business area, the
document describes several types of
stress testing activities and how they
may be most appropriately used by
banking organizations.
II. Overview of Stress Testing
Framework
For purposes of this guidance, stress
testing refers to exercises used to
conduct a forward-looking assessment
of the potential impact of various
adverse events and circumstances on a
banking organization. Stress testing
occurs at various levels of aggregation,
including on an enterprise-wide basis.
As outlined in section IV, there are
several approaches and applications for
3 Given the unique structure of U.S. branches and
agencies of foreign banking organizations, the
agencies recognize that certain aspects of this
guidance may not apply to those U.S. branches and
agencies (such as the portions related to capital
stress testing) or may apply differently (such as the
portions related to governance and controls).
Supervisors can work with these entities on a caseby-case basis to identify the portions of the
guidance that are most relevant for them.
4 While capital and liquidity stress tests may be
among the most prominent, other types of stress
testing exercises that use different metrics should
be conducted.

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stress testing and a banking organization
should consider the use of each in its
stress testing framework.
An effective stress testing framework
provides a comprehensive, integrated,
and forward-looking set of activities for
a banking organization to employ along
with other practices in order to assist in
the identification and measurement of
its material risks and vulnerabilities,
including those that may manifest
themselves during stressful economic or
financial environments, or arise from
firm-specific adverse events. Such a
framework should supplement other
quantitative risk management practices,
such as those that rely primarily on
statistical estimates of risk or loss
estimates based on historical data, as
well as qualitative practices. In this
manner, stress testing can assist in
highlighting unidentified or underassessed risk concentrations and
interrelationships and their potential
impact on the banking organization
during times of stress.5
A banking organization should
develop and implement its stress testing
framework in a manner commensurate
with its size, complexity, business
activities, and overall risk profile. Its
stress testing framework should include
clearly defined objectives, welldesigned scenarios tailored to the
banking organization’s business and
risks, well-documented assumptions,
sound methodologies to assess potential
impact on the banking organization’s
financial condition, informative
management reports, ongoing and
effective review of stress testing
processes, and recommended actions
based on stress test results. Stress
testing should incorporate the use of
high-quality data and appropriate
assumptions about the performance of
the institution under stress to ensure
that the outputs are credible and can be
used to support decision-making.
Importantly, a banking organization
should have a sound governance and
control infrastructure with objective,
critical review to ensure the stress
testing framework is functioning as
intended.
A stress testing framework should
allow a banking organization to conduct
consistent, repeatable exercises that
focus on its material exposures,
activities, risks, and strategies, and also
conduct ad hoc scenarios as needed.
The framework should consider the
impact of both firm-specific and
5 For purposes of this guidance, the term
‘‘concentrations’’ refers to groups of exposures and/
or activities that have the potential to produce
losses large enough to bring about a material change
in a banking organization’s risk profile or financial
condition.

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systemic stress events and
circumstances that are based on
historical experience as well as on
hypothetical occurrences that could
have an adverse impact on a banking
organization’s operations and financial
condition. Banking organizations
subject to this guidance should develop
policies on reviewing and assessing the
effectiveness of their stress testing
frameworks, and use those policies at
least annually to assess the effectiveness
of their frameworks. Such assessments
should help to ensure that stress testing
coverage is comprehensive, tests are
relevant and current, methodologies are
sound, and results are properly
considered.
III. General Stress Testing Principles
A banking organization should
develop and implement an effective
stress testing framework as part of its
broader risk management and
governance processes. The framework
should include several activities and
exercises, and not just rely on any single
test or type of test, since every stress test
has limitations and relies on certain
assumptions.
The uses of a banking organization’s
stress testing framework should include,
but are not limited to, augmenting risk
identification and measurement;
estimating business line revenues and
losses and informing business line
strategies; identifying vulnerabilities,
assessing the potential impact from
those vulnerabilities, and identifying
appropriate actions; assessing capital
adequacy and enhancing capital
planning; assessing liquidity adequacy
and informing contingency funding
plans; contributing to strategic planning;
enabling senior management to better
integrate strategy, risk management, and
capital and liquidity planning decisions;
and assisting with recovery and
resolution planning. This section
describes general principles that a
banking organization should apply in
implementing such a framework.
Principle 1: A banking organization’s
stress testing framework should include
activities and exercises that are tailored
to and sufficiently capture the banking
organization’s exposures, activities, and
risks.
An effective stress testing framework
covers a banking organization’s full set
of material exposures, activities, and
risks, whether on or off the balance
sheet, based on effective enterprise-wide
risk identification and assessment. Risks
addressed in a firm’s stress testing
framework may include (but are not
limited to) credit, market, operational,
interest-rate, liquidity, country, and
strategic risk. The framework should

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also address non-contractual sources of
risks, such as those related to a banking
organization’s reputation. Appropriate
coverage is important as stress testing
results could give a false sense of
comfort if certain portfolios, exposures,
liabilities, or business line activities are
not included. Stress testing exercises
should be part of a banking
organization’s regular risk identification
and measurement activities. For
example, in assessing credit risk a
banking organization should evaluate
the potential impact of adverse
outcomes, such as an economic
downturn or declining asset values, on
the condition of its borrowers and
counterparties, and on the value of any
supporting collateral. As another
example, in assessing interest-rate risk,
banking organizations should analyze
the effects of significant interest rate
shocks or other yield-curve movements.
An effective stress testing framework
should be applied at various levels in
the banking organization, such as
business line, portfolio, and risk type, as
well as on an enterprise-wide basis. In
many cases, stress testing may be more
effective at business line and portfolio
levels, as a higher level of aggregation
may cloud or underestimate the
potential impact of adverse outcomes on
a banking organization’s financial
condition. In some cases, stress testing
can also be applied to individual
exposures or instruments. Each stress
test should be tailored to the relevant
level of aggregation, capturing critical
risk drivers, internal and external
influences, and other key considerations
at the relevant level.
Stress testing should capture the
interplay among different exposures,
activities, and risks and their combined
effects. While stress testing several types
of risks or business lines simultaneously
may prove operationally challenging, a
banking organization should aim to
identify common risk drivers across risk
types and business lines that can
adversely affect its financial condition.
Accordingly, stress tests should provide
a banking organization with the ability
to identify potential concentrations—
including those that may not be readily
observable during benign periods and
whose sensitivity to a common set of
factors is apparent only during times of
stress—and to assess the impact of
identified concentrations of exposures,
activities, and risks within and across
portfolios and business lines and on the
organization as a whole.
Stress testing should be tailored to the
banking organization’s idiosyncrasies
and specific business mix and include
all major business lines and significant
individual counterparties. For example,

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a banking organization that is
geographically concentrated may
determine that a certain segment of its
business may be more adversely affected
by shocks to economic activity at the
state or local level than by a severe
national recession. On the other hand, if
the banking organization has significant
global operations, it should consider
scenarios that have an international
component and stress conditions that
could affect the different aspects of its
operations in different ways, as well as
conditions that could adversely affect
all of its operations at the same time.
A banking organization should use its
stress testing framework to determine
whether exposures, activities, and risks
under normal and stressed conditions
are aligned with the banking
organization’s risk appetite.6 A banking
organization can use stress testing to
help inform decisions about its strategic
direction and/or risk appetite by better
understanding the risks from its
exposures or of engaging in certain
business practices. For example, if a
banking organization pursues a business
strategy for a new or modified product,
and the banking organization does not
have long-standing experience with that
product or lacks extensive data, the
banking organization can use stress
testing to identify the product’s
potential downsides and unanticipated
risks. Scenarios used in a banking
organization’s stress tests should be
relevant to the direction and strategy set
by its board of directors, as well as
sufficiently severe to be credible to
internal and external stakeholders.
Principle 2: An effective stress testing
framework employs multiple
conceptually sound stress testing
activities and approaches.
All measures of risk, including stress
tests, have an element of uncertainty
due to assumptions, limitations, and
other factors associated with using past
performance measures and forwardlooking estimates. Banking
organizations should, therefore, use
multiple stress testing activities and
approaches (consistent with section IV),
and ensure that each is conceptually
sound. Stress tests usually vary in
design and complexity, including the
number of factors employed and the
degree of stress applied. A banking
organization should ensure that the
6 For purposes of this guidance, risk appetite is
defined as the level and type of risk an organization
is able and willing to assume in its exposures and
business activities, given its business objectives and
obligations to stakeholders. See Senior Supervisors
Group, Observations on Developments in Risk
Appetite Frameworks and IT Infrastructure
(December 23, 2010), available at http://
www.newyorkfed.org/newsevents/news/banking/
2010/an101223.pdf.

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complexity of any given test does not
undermine its integrity, usefulness, or
clarity. In some cases, relatively simple
tests can be very useful and informative.
Additionally, effective stress testing
relies on high-quality input data and
information to produce credible
outcomes. A banking organization
should ensure that it has readily
available data and other information for
the types of stress tests it uses,
including key variables that drive
performance. In addition, a banking
organization should have appropriate
management information systems (MIS)
and data processes that enable it to
collect, sort, aggregate, and update data
and other information efficiently and
reliably within business lines and across
the banking organization for use in
stress testing. If certain data and
information are not current or not
available, or if proxies are used, a
banking organization should analyze the
stress test outputs with an
understanding of those data limitations.
A banking organization should also
document the assumptions used in its
stress tests and note the degree of
uncertainty that may be incorporated
into the tools used for stress testing. In
some cases, it may be appropriate to
present and analyze test results not just
in terms of point estimates, but also
including the potential margin of error
or statistical uncertainty around the
estimates. Furthermore, almost all stress
tests, including well-developed
quantitative tests supported by highquality data, employ a certain amount of
expert or business judgment, and the
role and impact of such judgment
should be clearly documented. In some
cases, when credible data are lacking
and more quantitative tests are
operationally challenging or in the early
stages of development, a banking
organization may choose to employ
more qualitatively based tests, provided
that the tests are properly documented
and their assumptions are transparent.
Regardless of the type of stress tests
used, a banking organization should
understand and clearly document all
assumptions, uncertainties, and
limitations, and provide that
information to users of the stress testing
results.
Principle 3: An effective stress testing
framework is forward-looking and
flexible.
A stress testing framework should be
sufficiently dynamic and flexible to
incorporate changes in a banking
organization’s on- and off-balance-sheet
activities, portfolio composition, asset
quality, operating environment,
business strategy, and other risks that
may arise over time from firm-specific

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events, macroeconomic and financial
market developments, or some
combination of these events. A banking
organization should also ensure that its
MIS are capable of incorporating
relatively rapid changes in exposures,
activities, and risks.
While stress testing should utilize
available historical information, a
banking organization should look
beyond assumptions based only on
historical data and challenge
conventional assumptions. A banking
organization should ensure that it is not
constrained by past experience and that
it considers multiple scenarios, even
scenarios that have not occurred in the
recent past or during the banking
organization’s history. For example, a
banking organization should not assume
that if it has suffered no or minimal
losses in a certain business line or
product that such a pattern will
continue. Structural changes in
customer, product, and financial
markets can present unprecedented
situations for a banking organization. A
banking organization with any type of
significant concentration can be
particularly vulnerable to rapid changes
in economic and financial conditions
and should try to identify and better
understand the impact of those
vulnerabilities in advance. For example,
the risks related to residential mortgages
were underestimated for a number of
years leading up to the 2007–2009
financial crisis by a large number of
banking organizations, and those risks
eventually affected the banking
organizations in a variety of ways.
Effective stress testing can help a
banking organization identify any such
concentrations and help understand the
potential impact of several key aspects
of the business being exposed to
common drivers.
Stress testing should be conducted
over various relevant time horizons to
adequately capture both conditions that
may materialize in the near term and
adverse situations that take longer to
develop. For example, when a banking
organization stress tests a portfolio for
market and credit risks simultaneously,
it should consider that certain credit
risk losses may take longer to
materialize than market risk losses, and
also that the severity and speed of markto-market losses may create significant
vulnerabilities for the firm, even if a
more fundamental analysis of how
realized losses may play out over time
seems to show less threatening results.
A banking organization should carefully
consider the incremental and
cumulative effects of stress conditions,
particularly with respect to potential
interactions among exposures, activities,

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and risks and possible second-order or
‘‘knock-on’’ effects.
In addition to conducting formal,
routine stress tests, a banking
organization should have the flexibility
to conduct new or ad hoc stress tests in
a timely manner to address rapidly
emerging risks. These less routine tests
usually can be conducted in a short
amount of time and may be simpler and
less extensive than a banking
organization’s more formal, regular
tests. However, for its ad hoc tests a
banking organization should still have
the capacity to bring together
approximated information on risks,
exposures, and activities and assess
their impact.
More broadly, a banking organization
should continue updating and
maintaining its stress testing framework
in light of new risks, better
understanding of the banking
organization’s exposures and activities,
new stress testing techniques, and any
changes in its operating structure and
environment. A banking organization’s
stress testing development should be
iterative, with ongoing adjustments and
refinements to better calibrate the tests
to provide current and relevant
information. Banking organizations
should document the ongoing
development of their stress testing
practices.
Principle 4: Stress test results should
be clear, actionable, well supported, and
inform decision-making.
Stress testing should incorporate
measures that adequately and effectively
convey results of the impact of adverse
outcomes. Such measures may include,
for example, changes to asset values,
accounting and economic profit and
loss, revenue streams, liquidity levels,
cash flows, regulatory capital, riskweighted assets, the loan loss
allowance, internal capital estimates,
levels of problem assets, breaches in
covenants or key trigger levels, or other
relevant measures. Stress test measures
should be tailored to the type of test and
the particular level at which the test is
applied (for example, at the business
line or risk level). Some stress tests may
require using a range of measures to
evaluate the full impact of certain
events, such as a severe systemic event.
In addition, all stress test results should
be accompanied by descriptive and
qualitative information (such as key
assumptions and limitations) to allow
users to interpret the exercises in
context. The analysis and the process
should be well documented so that
stress testing processes can be replicated
if need be.
A banking organization should
regularly communicate stress test results

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to appropriate levels within the banking
organization to foster dialogue around
stress testing, keep the board of
directors, management, and staff
apprised, and to inform stress testing
approaches, results, and decisions in
other areas of the banking organization.
A banking organization should maintain
an internal summary of test results to
document at a high level the range of its
stress testing activities and outcomes, as
well as proposed follow-up actions.
Regular review of stress test results can
be an important part of a banking
organization’s ability over time to track
the impact of ongoing business
activities, changes in exposures, varying
economic conditions, and market
movements on its financial condition. In
addition, management should review
stress testing activities on a regular basis
to determine, among other things, the
validity of the assumptions, the severity
of tests, the robustness of the estimates,
the performance of any underlying
models, and the stability and
reasonableness of the results.
Stress test results should inform
analysis and decision-making related to
business strategies, limits, risk profile,
and other aspects of risk management,
consistent with the banking
organization’s established risk appetite.
A banking organization should review
the results of its various stress tests with
the strengths and limitations of each test
in mind (consistent with Principle 2),
determine which results should be
given greater or lesser weight, analyze
the combined impact of its tests, and
then evaluate potential courses of action
based on that analysis. A banking
organization may decide to maintain its
current course based on test results;
indeed, the results of highly severe
stress tests need not always indicate that
immediate action has to be taken.
Wherever possible, benchmarking or
other comparative analysis should be
used to evaluate the stress testing results
relative to other tools and measures—
both internal and external to the
banking organization—to provide
proper context and a check on results.
Principle 5: An organization’s stress
testing framework should include strong
governance and effective internal
controls.
Similar to other aspects of its risk
management, a banking organization’s
stress testing framework will be
effective only if it is subject to strong
governance and effective internal
controls to ensure the framework is
functioning as intended. Strong
governance and effective internal
controls help ensure that the framework
contains core elements, from clearly
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recommended actions. Importantly,
strong governance provides critical
review of elements of the stress testing
framework, especially regarding key
assumptions, uncertainties, and
limitations. A banking organization
should ensure that the stress testing
framework is not isolated within a
banking organization’s risk management
function, but is firmly integrated into
business lines, capital and asset-liability
committees, and other decision-making
bodies. Along those lines, the board of
directors and senior management
should play key roles in ensuring strong
governance and controls. The extent and
sophistication of a banking
organization’s governance over its stress
testing framework should align with the
extent and sophistication of that
framework. Additional details regarding
governance and controls of an
organization’s stress testing framework
are outlined in section VI.
IV. Stress Testing Approaches and
Applications
This section discusses some general
types of stress testing approaches and
applications. For any type of stress test,
banking organizations should indicate
the specific purpose and the focus of the
test. Defining the scope of a given stress
test is also important, whether it applies
at the portfolio, business line, risk type,
or enterprise-wide level, or even just for
an individual exposure or counterparty.
Based on the purpose and scope of the
test, different stress testing techniques
are most useful. Thus, a banking
organization should employ several
approaches and applications; these
might include scenario analysis,
sensitivity analysis, enterprise-wide
stress testing, and reverse stress testing.
Consistent with Principle 1, banking
organizations should apply these
commensurate with their size,
complexity, and business profile, and
may not need to incorporate all of the
details described below. Consistent with
Principle 3, banking organizations
should also recognize that stress testing
approaches will evolve over time and
they should update their practices as
needed.
Scenario Analysis
Scenario analysis refers to a type of
stress testing in which a banking
organization applies historical or
hypothetical scenarios to assess the
impact of various events and
circumstances, including extreme ones.
Scenarios usually involve some kind of
coherent, logical narrative or ‘‘story’’ as
to why certain events and circumstances
can occur and in which combination
and order, such as a severe recession,

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failure of a major counterparty, loss of
major clients, natural or man-made
disaster, localized economic downturn,
disruptions in funding or capital
markets, or a sudden change in interest
rates brought about by unfavorable
inflation developments. Scenario
analysis can be applied at various levels
of the banking organization, such as
within individual business lines to help
identify factors that could harm those
business lines most.
Stress scenarios should reflect a
banking organization’s unique
vulnerabilities to factors that affect its
exposures, activities, and risks. For
example, if a banking organization is
concentrated in a particular line of
business, such as commercial real estate
or residential mortgage lending, it
would be appropriate to explore the
impact of a downturn in those particular
market segments. Similarly, a banking
organization with lending
concentrations to oil and gas companies
should include scenarios related to the
energy sector. Other relevant factors to
be considered in scenario analysis relate
to operational, reputational and legal
risks to a banking organization, such as
significant events of fraud or litigation,
or a situation when a banking
organization feels compelled to provide
support to an affiliate or provide other
types of non-contractual support to
avoid reputational damage. Scenarios
should be internally consistent and
portray realistic outcomes based on
underlying relationships among
variables, and should include only those
mitigating developments that are
consistent with the scenario.
Additionally, a banking organization
should consider the best manner to try
to capture combinations of stressful
events and circumstances, including
second-order and ‘‘knock-on’’ effects.
Ultimately, a banking organization
should select and design multiple
scenarios that are relevant to its profile
and make intuitive sense, use enough
scenarios to explore the range of
potential outcomes, and ensure that the
scenarios continue to be timely and
relevant.
A banking organization may apply
scenario analysis within the context of
its existing risk measurement tools (e.g.,
the impact of a severe decline in market
prices on a banking organization’s
value-at-risk (VaR) measure) or use it as
an alternative, supplemental measure.
For instance, a banking organization
may use scenario analysis to measure
the impact of a severe financial market
disturbance and compare those results
to what is produced by its VaR or other
measures. This type of scenario analysis
should account for known shortcomings

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of other risk measurement practices. For
example, market risk VaR models
generally assume liquid markets with
known prices. Scenario analysis could
shed light on the effects of a breakdown
in liquidity and of valuation difficulties.
One of the key challenges with
scenario analysis is to translate a
scenario into balance sheet impact,
changes in risk measures, potential
losses, or other measures of adverse
financial impact, which would vary
depending on the test design and the
type of scenario used. For some aspects
of scenario analysis, banking
organizations may use econometric or
similar types of analysis to estimate a
relationship between some underlying
factors or drivers and risk estimates or
loss projections based on a given data
set, and then extrapolate to see the
impact of more severe inputs. Care
should be taken not to make
assumptions that relationships from
benign or mildly adverse times will
hold during more severe times or that
estimating such relationships is
relatively straightforward. For example,
linear relationships between risk drivers
and losses may become nonlinear
during times of stress. In addition,
organizations should recognize that
there can be multiple permutations of
outcomes from just a few key risk
drivers.
Sensitivity Analysis
Sensitivity analysis refers to a banking
organization’s assessment of its
exposures, activities, and risks when
certain variables, parameters, and inputs
are ‘‘stressed’’ or ‘‘shocked.’’ A key goal
of sensitivity analysis is to test the
impact of assumptions on outcomes.
Generally, sensitivity analysis differs
from scenario analysis in that it involves
changing variables, parameters, or
inputs without an explicit underlying
reason or narrative, in order to explore
what occurs under a range of inputs and
at extreme or highly adverse levels. In
this type of analysis a banking
organization may realize, for example,
that a given relationship is much more
difficult to estimate at extreme levels.
A banking organization may apply
sensitivity analysis at various levels of
aggregation to estimate the impact from
a change in one or more key variables.
The results may help a banking
organization better understand the range
of outcomes from some of its models,
such as developing a distribution of
output based on a variety of extreme
inputs. For example, a banking
organization may choose to calculate a
range of changes to a structured
security’s overall value using a range of
different assumptions about the

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performance and linkage of underlying
cash flows. Sensitivity analysis should
be conducted periodically due to
potential changes in a banking
organization’s exposures, activities,
operating environment, or the
relationship of variables to one another.
Sensitivity analysis can also help to
assess a combined impact on a banking
organization of several variables,
parameters, factors, or drivers. For
example, a banking organization could
better understand the impact on its
credit losses from a combined increase
in default rates and a decrease in
collateral values. A banking
organization could also explore the
impact of highly adverse capitalization
rates, declines in net operating income,
and reductions in collateral when
evaluating its risks from commercial
real estate exposures. Sensitivity
analysis can be especially useful
because it is not necessarily
accompanied by a particular narrative or
scenario; that is, sensitivity analysis can
provide banking organizations more
flexibility to explore the impact of
potential stresses that they may not be
able to capture in designed scenarios.
Furthermore, banking organizations may
decide to conduct sensitivity analysis of
their scenarios, i.e., choosing different
levels or paths of variables to
understand the sensitivities of choices
made during scenario design. For
instance, banking organizations may
decide to apply a few different interestrate paths for a given scenario.
Enterprise-Wide Stress Testing
Enterprise-wide stress testing is an
application of stress testing that
involves assessing the impact of certain
specified scenarios on the banking
organization as a whole, particularly
with regard to capital and liquidity. As
is the case with scenario analysis more
generally, enterprise-wide stress testing
involves robust scenario design and
effective translation of scenarios into
measures of impact. Enterprise-wide
stress tests can help a banking
organization in its efforts to assess the
impact of its full set of risks under
adverse events and circumstances, but
should be supplemented with other
stress tests and other risk measurement
tools given inherent limitations in
capturing all risks and all adverse
outcomes in one test.
Scenario design for enterprise-wide
stress testing involves developing
scenarios that affect the banking
organization as a whole that stem from
macroeconomic, market-wide, and/or
firm-specific events. These scenarios
should incorporate the potential
simultaneous occurrence of both firm-

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specific and macroeconomic and
market-wide events, considering
system-wide interactions and feedback
effects. For example, price shocks may
lead to significant portfolio losses, rising
funding gaps, a ratings downgrade, and
diminished access to funding. In
general, it is a good practice to consult
with a large set of individuals within
the banking organization—in various
business lines, research and risk areas—
to gain a wide perspective on how
enterprise-wide scenarios should be
designed and to ensure that the
scenarios capture the relevant aspects of
the banking organization’s business and
risks. Banking organizations should also
conduct scenarios of varying severity to
gauge the relative impact. At least some
scenarios should be of sufficient
severity to challenge the viability of the
banking organization, and should
include instantaneous market shocks
and stressful periods of extended
duration (e.g., not just a one- or twoquarter shock after which conditions
return to normal).
Selection of scenario variables is
important for enterprise-wide tests,
because these variables generally serve
as the link between the overall narrative
of the scenario and tangible impact on
the banking organization as a whole. For
instance, in aiming to capture the
combined impact of a severe recession
and a financial market downturn, a
banking organization may choose a set
of variables such as changes in gross
domestic product (GDP), unemployment
rate, interest rates, stock market levels,
or home price levels. However,
particularly when assessing the impact
on the whole banking organization,
using a large number of variables can
make a test more cumbersome and
complicated—so a banking organization
may also benefit from simpler scenarios
or from those with fewer variables.
Banking organizations should balance
the comprehensiveness of contributing
variables and tractability of the exercise.
As with scenario analysis generally,
translating scenarios into tangible
effects on the banking organization as a
whole presents certain challenges. A
banking organization should identify
appropriate and meaningful
mechanisms for translating scenarios
into relevant internal risk parameters
that provide a firm-wide view of risks
and understanding of how these risks
are translated into loss estimates. Not all
business areas are equally affected by a
given scenario, and problems in one
business area can have effects on other
units. However, for an enterprise-wide
test, assumptions across business lines
and risk areas should remain constant
for the chosen scenario, since the

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objective is to see how the banking
organization as a whole will be affected
by a common scenario.
Reverse Stress Testing
Reverse stress testing is a tool that
allows a banking organization to assume
a known adverse outcome, such as
suffering a credit loss that breaches
regulatory capital ratios or suffering
severe liquidity constraints that render
it unable to meet its obligations, and
then deduce the types of events that
could lead to such an outcome. This
type of stress testing may help a banking
organization to consider scenarios
beyond its normal business expectations
and see the impact of severe systemic
effects on the banking organization. It
also allows a banking organization to
challenge common assumptions about
its performance and expected mitigation
strategies.
Reverse stress testing helps to explore
so-called ‘‘break the bank’’ situations,
allowing a banking organization to set
aside the issue of estimating the
likelihood of severe events and to focus
more on what kinds of events could
threaten the viability of the banking
organization. This type of stress testing
also helps a banking organization
evaluate the combined effect of several
types of extreme events and
circumstances that might threaten the
survival of the banking organization,
even if in isolation each of the effects
might be manageable. For instance,
reverse stress testing may help a
banking organization recognize that a
certain level of unemployment would
have a severe impact on credit losses,
that a market disturbance could create
additional losses and result in rising
funding costs, and that a firm-specific
case of fraud would cause even further
losses and reputational impact that
could threaten a banking organization’s
viability. In some cases, reverse stress
tests could reveal to a banking
organization that ‘‘breaking the bank’’ is
not as remote an outcome as originally
thought.
Given the numerous potential threats
to a banking organization’s viability, the
organization should ensure that it
focuses first on those scenarios that
have the largest firm-wide impact, such
as insolvency or illiquidity, but also on
those that seem most imminent given
the current environment. Focusing on
the most prominent vulnerabilities
helps a banking organization prioritize
its choice of scenarios for reverse stress
testing. However, a banking
organization should also consider a
wider range of possible scenarios that
could jeopardize the viability of the
banking organization, exploring what

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could represent potential blind spots.
Reverse stress testing can highlight
previously unacknowledged sources of
risk that could be mitigated through
enhanced risk management.
V. Stress Testing for Assessing the
Adequacy of Capital and Liquidity
There are many uses of stress testing
within banking organizations.
Prominent among these are stress tests
designed to assess the adequacy of
capital and liquidity. Given the
importance of capital and liquidity to a
banking organization’s viability, stress
testing should be applied in these two
areas in particular, including an
evaluation of the interaction between
capital and liquidity and the potential
for both to become impaired at the same
time. Depletions and shortages of capital
or liquidity can cause a banking
organization to no longer perform
effectively as a financial intermediary,
be viewed by its counterparties as no
longer viable, become insolvent, or
diminish its capacity to meet legal and
financial obligations. A banking
organization’s capital and liquidity
stress testing should consider how
losses, earnings, cash flows, capital, and
liquidity would be affected in an
environment in which multiple risks
manifest themselves at the same time,
for example, an increase in credit losses
during an adverse interest-rate
environment. Additionally, banking
organizations should recognize that at
the end of the time horizon considered
by a given stress test, they may still have
substantial residual risks or problem
exposures that may continue to pressure
capital and liquidity resources.
Stress testing for capital and liquidity
adequacy should be conducted in
coordination with a banking
organization’s overall strategy and
annual planning cycles. Results should
be refreshed in the event of major
strategic decisions, or other decisions
that can materially impact capital or
liquidity. Banking organizations should
conduct stress testing for capital and
liquidity adequacy periodically.
Capital Stress Testing
Capital stress testing results can serve
as a useful tool to support a banking
organization’s capital planning and
corporate governance.7 They may help a
banking organization better understand
its vulnerabilities and evaluate the
impact of adverse outcomes on its
7 In this manner, stress testing can form an
integral part of an organization’s internal capital
adequacy process, consistent with supervisory
standards outlined in SR 09–4, SR 99–18, and
Supervisory Review Process of Capital Adequacy,
supra note 12.

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capital position and ensure that the
banking organization holds adequate
capital given its business model,
including the complexity of its activities
and its risk profile. Capital stress testing
complements a banking organization’s
regulatory capital analysis 8 by
providing a forward-looking assessment
of capital adequacy, usually with a
forecast horizon of at least two years
(with the recognition that the effects of
certain stress conditions could extend
beyond two years for some stress tests),
and highlighting the potential adverse
effects on capital levels and ratios from
risks not fully captured in regulatory
capital requirements. It should also be
used to help a banking organization
assess the quality and composition of
capital and its ability to absorb losses.
Stress testing can aid capital
contingency planning by helping
management identify exposures or risks
in advance that would need to be
reduced and actions that could be taken
to bolster capital levels or otherwise
maintain capital adequacy, as well as
actions that in times of stress might not
be possible—such as raising capital.
Capital stress testing should include
exercises that analyze the potential for
changes in earnings, losses, reserves,
and other potential effects on capital
under a variety of stressful
circumstances. Such testing should also
capture any potential change in riskweighted assets, the ability of capital to
absorb losses, and any resulting impact
on the banking organization’s capital
ratios. It should include all relevant risk
types and other factors that have a
potential to affect capital adequacy,
whether directly or indirectly, including
firm-specific ones. A banking
organization should also explore the
potential for possible balance sheet
expansion to put pressure on capital
ratios and consider risk mitigation and
capital preservation options, other than
simply shrinking the balance sheet.
Capital stress testing should assess the
potential impact of a banking
organization’s material subsidiaries
suffering capital problems on their
own—such as being unable to meet
local country capital requirements—
even if the consolidated banking
8 While savings and loan holding companies
currently are not subject to consolidated regulatory
leverage or risk-based capital requirements, a
savings and loan holding company should have
sufficient capital and an effective capital planning
process, consistent with its overall risk profile and
considering the size, scope, and complexity of its
operations, to ensure the safe and sound operation
of the company. See Supervision and Regulation
Letter SR 11–11, Supervision of Savings and Loan
Holding Companies (July 21, 2011), available at
http://www.federalreserve.gov/bankinforeg/
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organization is not encountering
problems.9 Where material relative to
the banking organization’s capital,
counterparty exposures should also be
included in capital stress testing.
Enterprise-wide stress testing, as
described in section IV, should be an
integral part of a banking organization’s
capital stress testing.10 Such enterprisewide testing should include pro-forma
estimates of not only potential losses
and resources available to absorb losses,
but also potential planned capital
actions (such as dividends or share
repurchases) that would affect the
banking organization’s capital position,
including regulatory and other capital
ratios. There should also be
consideration of the impact on the
banking organization’s allowance for
loan and lease losses and other relevant
financial metrics. Even with very
effective enterprise-wide tests, banking
organizations should use capital stress
testing in conjunction with other
internal approaches (in addition to
regulatory measures) for assessing
capital adequacy, such as those that rely
primarily on statistical estimates of risk
or loss estimates based on historical
data.
Liquidity Stress Testing
A banking organization should also
conduct stress testing for liquidity
adequacy.11 Through such stress testing
a banking organization can work to
identify vulnerabilities related to
liquidity adequacy in light of both firmspecific and market-wide stress events
and circumstances. Effective stress
testing helps a banking organization
identify and quantify the depth, source,
and degree of potential liquidity and
funding strain and to analyze possible
impacts on its cash flows, liquidity
position, profitability, and other aspects
of its financial condition over various
time horizons. For example, stress
testing can be used to explore potential
funding shortfalls, shortages in liquid
assets, the inability to issue debt,
exposure to possible deposit outflows,
volatility in short-term brokered
deposits, sensitivity of funding to a
ratings downgrade, and the impact of
reduced collateral values on borrowing
capacity at the Federal Home Loan
Banks, the Federal Reserve discount
9 For regulated subsidiaries, stress testing
activities should be fully consistent with the
regulations and guidance of the relevant primary
federal supervisor.
10 The agencies expect that the stress test
requirements in the Dodd-Frank Act for companies
with more than $10 billion in assets would be an
integral part of this type of stress testing.
11 See, Funding and Liquidity Risk Management
Policy Statement and Interest Rate Risk Advisory,
supra note 12.

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window, or other secured wholesale
funding sources.
Liquidity stress testing should explore
the potential impact of adverse
developments that may affect market
and asset liquidity, including the
freezing up of credit and funding
markets, and the corresponding impact
on the banking organization. Such tests
can also help identify the conditions
under which balance sheets might
expand, thus creating additional
funding needs (e.g., through accelerated
drawdowns on unfunded
commitments). These tests also help
determine whether the banking
organization has a sufficient liquidity
buffer to meet various types of future
liquidity demands under stressful
conditions. In this regard, liquidity
stress testing should be an integral part
of the development and maintenance of
a banking organization’s contingency
funding planning. Liquidity stress
testing should include enterprise-wide
tests as discussed in section IV, but
should also be applied, as appropriate,
at lower levels of the banking
organization, and in particular should
account for regulatory or supervisory
restrictions on inter-affiliate funding
and asset transfers. As with capital
stress testing, banking organizations
may need to conduct liquidity stress
tests at both the consolidated and
subsidiary level. In undertaking
enterprise-wide liquidity tests banking
organizations should make realistic
assumptions as to the implications of
liquidity stresses in one part of the
banking organization on other parts.
An effective stress testing framework
should explore the potential for capital
and liquidity problems to arise at the
same time or exacerbate one another.
For example, a banking organization in
a stressed liquidity position is often
required to take actions that have a
negative direct or indirect capital
impact (e.g., selling assets at a loss or
incurring funding costs at above market
rates to meet funding needs). A banking
organization’s liquidity stress analysis
should explore situations in which the
banking organization may be operating
with a capital position that exceeds
regulatory minimums, but is
nonetheless viewed within the financial
markets or by its counterparties as being
of questionable viability. Assessing the
potential interaction of capital and
liquidity can be challenging and may
not be possible within a single stress
test, so organizations should explore
several avenues to assess that
interaction. As with other applications
of stress testing, for its capital and
liquidity stress tests, it is beneficial for
a banking organization to articulate

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Federal Register / Vol. 77, No. 96 / Thursday, May 17, 2012 / Notices
clearly its objectives for a post-stress
outcome, for instance to remain a viable
financial market participant that is able
to meet its existing and prospective
obligations and commitments. In such
cases, banking organizations would
have to consider which measures of
financial condition would need to be
met on a post-stress basis to secure the
confidence of counterparties and market
participants.

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VI. Governance and Controls
As noted under Principle 5, a banking
organization’s stress testing framework
will be effective only if it is subject to
strong governance and controls to
ensure the framework is functioning as
intended. The extent and sophistication
of a banking organization’s governance
over its stress testing framework should
align with the extent and sophistication
of that framework.
Governance over a banking
organization’s stress testing framework
rests with the banking organization’s
board of directors and senior
management. As part of their overall
responsibilities, a banking
organization’s board and senior
management should establish a
comprehensive, integrated and effective
stress testing framework that fits into
the broader risk management of the
banking organization. While the board is
ultimately responsible for ensuring that
the banking organization has an
effective stress testing framework, senior
management generally has
responsibility for implementing that
framework. Senior management duties
should include establishing adequate
policies and procedures and ensuring
compliance with those policies and
procedures, assigning competent staff,
overseeing stress test development and
implementation, evaluating stress test
results, reviewing any findings related
to the functioning of stress test
processes, and taking prompt remedial
action where necessary. Senior
management, directly and through
relevant committees, also should be
responsible for regularly reporting to the
board on stress testing developments
(including the process to design tests
and develop scenarios) and on stress
testing results (including from
individual tests, where material), as
well as on compliance with stress
testing policy. Board members should
actively evaluate and discuss this
information, ensuring that the stress
testing framework is in line with the
banking organization’s risk appetite,
overall strategy and business plans, and
contingency plans, directing changes
where appropriate.

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A banking organization should have
written policies, approved and annually
reviewed by the board, that direct and
govern the implementation of the stress
testing framework in a comprehensive
manner. Policies, along with procedures
to implement them, should:
• Describe the overall purpose of
stress testing activities;
• Articulate consistent and
sufficiently rigorous stress testing
practices across the entire banking
organization;
• Indicate stress testing roles and
responsibilities, including controls over
external resources used for any part of
stress testing (such as vendors and data
providers);
• Describe the frequency and priority
with which stress testing activities
should be conducted;
• Indicate how stress test results are
used, by whom, and outline instances in
which remedial actions should be taken;
and
• Be reviewed and updated as
necessary to ensure that stress testing
practices remain appropriate and keep
up to date with changes in market
conditions, banking organization
products and strategies, banking
organization exposures and activities,
the banking organization’s established
risk appetite, and industry stress testing
practices.
A stress testing framework should
incorporate validation or other type of
independent review to ensure the
integrity of stress testing processes and
results, consistent with existing
supervisory expectations.12 If a banking
organization engages a third party
vendor to support some or all of its
stress testing activities, there should be
appropriate controls in place to ensure
that those externally developed systems
and processes are sound, applied
correctly, and appropriate for the
banking organization’s risks, activities,
and exposures. Additionally, senior
management should be mindful of any
potential inconsistencies,
contradictions, or gaps among its stress
tests and assess what actions should be
taken as a result. Internal audit should
also provide independent evaluation of
the ongoing performance, integrity, and
reliability of the stress testing
framework. A banking organization
should ensure that its stress tests are
12 For validation of models and other quantitative
tools used for stress testing, see OCC Bulletin 2011–
12, Supervisory Guidance on Model Risk
Management (April 4, 2011), available at http://
www.occ.gov/news-issuances/bulletins/2011/
bulletin-2011-12a.pdf; or Supervision and
Regulation Letter SR 11–7, Guidance on Model Risk
Management (April 4, 2011), available at http://
www.federalreserve.gov/bankinforeg/srletters/
sr1107.pdf.

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documented appropriately, including a
description of the types of stress tests
and methodologies used, key
assumptions, results, and suggested
actions. Senior management, in
consultation with the board, should
review stress testing activities and
results with an appropriately critical eye
and ensure that there is objective review
of all stress testing processes.
The results of stress testing analyses
should facilitate decision-making by the
board and senior management. Stress
testing results should be used to inform
the board about alignment of the
banking organization’s risk profile with
the board’s chosen risk appetite, as well
as inform operating and strategic
decisions. Stress testing results should
be considered directly by the board and
senior management for decisions
relating to capital and liquidity
adequacy, including capital contingency
plans and contingency funding plans.
Senior management, in consultation
with the board, should ensure that the
stress testing framework includes a
sufficient range of stress testing
activities applied at the appropriate
levels of the banking organization (i.e.,
not just one enterprise-wide stress test).
Sound governance also includes using
stress testing to consider the
effectiveness of a banking organization’s
risk mitigation techniques for various
risk types over their respective time
horizons, such as to explore what could
occur if expected mitigation techniques
break down during stressful periods.
VII. Conclusion
A banking organization should use
the principles laid out in this guidance
to develop, implement, and maintain an
effective stress testing framework. Such
a framework should be adequately
tailored to the banking organization’s
size, complexity, risks, exposures, and
activities. A key purpose of stress
testing is to explore various types of
possible outcomes, including rare and
extreme events and circumstances,
assess their impact on the banking
organization, and then evaluate the
boundaries up to which the banking
organization plans to be able to
withstand such outcomes. Stress testing
may be particularly valuable during
benign periods when other measures
may not indicate emerging risks.
While stress testing can provide
valuable information regarding potential
future outcomes, similar to any other
risk management tool it has limitations
and cannot provide absolute certainty
regarding the implications of assumed
events and impacts. Furthermore,
management should ensure that stress
testing activities are not constrained to

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Federal Register / Vol. 77, No. 96 / Thursday, May 17, 2012 / Notices

reflect past experiences, but instead
consider a broad range of possibilities.
No single stress test can accurately
estimate the impact of all stressful
events and circumstances; therefore, a
banking organization should understand
and account for stress testing limitations
and uncertainties, and use stress tests in
combination with other risk
management tools to make informed
risk management and business
decisions.

DEPARTMENT OF THE TREASURY

Dated: May 10, 2012.
Thomas J. Curry,
Comptroller of the Currency.

SUMMARY:

By order of the Board of Governors of the
Federal Reserve System, May 11, 2012.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 10th day of
May 2012.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2012–11989 Filed 5–16–12; 8:45 am]

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BILLING CODE CODE 4810–33–P; 6210–01–P; 6714–01–P

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Fiscal Service
Surety Companies Acceptable on
Federal Bonds—Termination: Atlantic
Bonding Company, Inc.
Financial Management Service,
Fiscal Service, Department of the
Treasury.
ACTION: Notice.
AGENCY:

This is Supplement No. 19 to
the Treasury Department Circular 570,
2011 Revision, published July 1, 2011,
at 76 FR 38892.
FOR FURTHER INFORMATION CONTACT:
Surety Bond Branch at (202) 874–6850.
SUPPLEMENTARY INFORMATION: Notice is
hereby given that the Certificate of
Authority issued by the Treasury to the
above-named company under 31 U.S.C.
9305 to qualify as acceptable surety on
Federal bonds is terminated effective
today. Federal bond-approving officials
should annotate their reference copies
of the Treasury Department Circular 570

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(‘‘Circular’’), 2011 Revision, to reflect
this change.
With respect to any bonds currently
in force with this company, bondapproving officers may let such bonds
run to expiration and need not secure
new bonds. However, no new bonds
should be accepted from this company,
and bonds that are continuous in nature
should not be renewed.
The Circular may be viewed and
downloaded through the Internet at
www.fms.treas.gov/c570.
Questions concerning this notice may
be directed to the U.S. Department of
the Treasury, Financial Management
Service, Financial Accounting and
Services Division, Surety Bond Branch,
3700 East-West Highway, Room 6F01,
Hyattsville, MD 20782.
Dated: May 8, 2012.
Laura Carrico,
Director, Financial Accounting and Services
Division.
[FR Doc. 2012–11893 Filed 5–16–12; 8:45 am]
BILLING CODE 4810–35–P

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