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FDIC Proposes Stress Testing Rule

Reese Darragh | January 18, 2012

The Federal Deposit Insurance Corporation approved a proposed rulemaking notice on January 17 to require large insured depository institutions be the subject of an annual capital-adequacy stress tests. The test, as required under a provision in the Dodd-Frank Act will apply to FDIC-insured state non-member banks and FDIC-insured state-chartered savings associations with total assets of more than $10 billion. The agency regulated 23 state non-member banks with total assets of more than $10 billion as of Sept 30 last year.

In a statement, the agency said the tests would provide forward-looking information to assist the FDIC in evaluating the adequacy of capital owned by the banks covered under the rule. “The banks that would be required to conduct the stress tests also are expected to benefit from improved internal assessments of capital adequacy and overall capital planning,” it said in a statement.

Under the proposed rule, the stress test is defined as a process to assess the potential impact of economic and financial conditions of the consolidated earnings, losses and capital of the bank over a set planning horizon. It will take into account of the current bank's condition together with its risks, exposures, strategies, and activities. The proposal further described the content of the reports institutions are required to publish, and the timeline for conducting the tests and producing the reports.

FDIC Acting Chairman Martin J. Gruenberg said, "Both the FDIC and the institutions being tested will benefit from the forward-looking results that the stress tests will provide. The results will assist in ensuring an institution's financial stability by helping determine whether it has sufficient capital levels to withstand a period of economic stress."

The Dodd-Frank Act requires each primary federal financial regulator, including the FDIC, to issue consistent and comparable stress-testing regulations for financial companies with total consolidated assets of more than $10 billion. In terms of its requirements, the proposed rulemaking notice is substantively similar to a proposal the Federal Reserve published in December 2011.

The FDIC's proposal will be published in the Federal Register with a 60-day public comment period.