U.S. Supervisors Release Guidance for Bank Stress Testing

U.S. bank regulators released guidance for firms with more than $10 billion in assets for self-testing their portfolios against adverse economic scenarios, emphasizing the role of “strong internal governance.”

“The guidance highlights the importance of stress testing at banking organizations as an ongoing risk management practice that supports a banking organization’s forward-looking assessment of its risks and better equips it to address a range of adverse outcomes,” the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency said today in a release in Washington.

The release is the final version of guidance that banking regulators first requested comment on in June of 2011, 11 months before JPMorgan Chase & Co. (JPM) reported a $2 billion trading loss that focused renewed attention on risk management at banks.

The guidance is separate from stress-testing requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act and the annual capital planning stress tests performed by the Fed. Those requirements have been, or are being, put in place through separate proposals, the regulators said.

The Fed completed annual tests in March. The central bank said 15 of the 19 largest U.S. banks, including JPMorgan, Goldman Sachs Group Inc. (GS) and Wells Fargo & Co. (WFC) could maintain adequate capital levels even in a recession scenario in which they continue paying dividends and buy back stock.

Risk Management

The agencies today said the release builds upon previously issued guidance on the uses and merits of stress testing in specific areas of risk management. The release outlines general principles for a satisfactory stress testing framework, describes various stress testing approaches, and outlines how stress testing should be used at various levels within a firm, the regulators said.

The guidance also discusses the importance of stress testing in capital and liquidity planning and of “strong internal governance and controls as part of an effective stress- testing framework,” according to the release.

The agencies specified the new rules do not apply to community banks, defined as those institutions with less than $10 billion in assets.

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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