The OCC, FRB and FDIC (collectively, the “Agencies”) issued joint final guidance (the “Final Guidance”) concerning the Agencies’ key supervisory expectations regarding how medium-sized banking organizations--those with more than $10 billion but less than $50 billion in total consolidated assets (“Medium-Sized Banking Firms”)--will implement the stress tests (the “Stress Tests”) required under section 165(i)(2) of the Dodd-Frank Act.  In performing their Stress Tests, Medium-Sized Banking Firms are required to assess the potential impact of at least three macroeconomic scenarios—baseline, adverse and severely adverse—on the Medium-Sized Banking Firm’s consolidated losses, revenues, balance sheet and capital (including risk-weighted assets).  The Agencies emphasize that the Stress Test requirements discussed in the Final Guidance (and which provide detail regarding the requirements of the final Stress Test rules adopted in October 2012 by the Agencies for Medium-Sized Banking Firms) are flexible and are intended to accommodate differences in risk profile, size, business mix, market footprint and complexity.

The Final Guidance discusses the principles behind Stress Test requirements and practices and provides information concerning the Stress Test methodologies that should be used by Medium-Sized Banking Firms.  The Final Guidance is similar to the proposed version of the guidance that was issued in July 2013 and discussed in the August 13, 2013 Financial Services Alert.  Medium-Sized Banking firms are required to complete their first Stress Tests by March 31, 2014.

In the Final Guidance, the Agencies state that Medium-Sized Banking Firms “are expected to have appropriate management information systems and data processes that enable them to collect, sort, aggregate, and update data and other information efficiently and reliably within business lines and across the company” [and the data used in the Stress Tests] should be generally consistent across time.  In addition, the Final Guidance provides detail regarding the requirement that a Medium-Sized Banking Firm publicly disclose a summary of the results of its Stress Tests.  Moreover, the Agencies note, the public disclosure should make it clear that the Stress Tests results are conditioned on the assumptions made in the scenarios provided by the Agencies to the Medium-Sized Banking Firms.  Furthermore, the Final Guidance requires that a Mid-Sized Banking Firm’s Board of Directors “should ensure it remains informed about critical review of elements of the [Stress Tests] conducted by senior management or others (such as internal audit), especially regarding key assumptions, uncertainties, and limitations.”

In the Final Guidance, the Agencies confirmed that Medium-Sized Banking Firms (unlike banking firms with $50 billion or more in total consolidated assets) are not subject to the FRB’s annual Comprehensive Capital Analysis and Review, the FRB’s capital plan rule, Dodd-Frank Act supervisory stress tests for capital adequacy and various related data collection requirements.  The OCC’s expectations for stress testing by community banks (those with less than $10 billion in total consolidated assets) were discussed in the October 23, 2012 Financial Services Alert.

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