14.05.2012
By Simon Miller
US regulators have finalised the supervisory guidance for the stress testing practices of banks worth more than $10bn (£6.22bn).
The Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation on Monday issued final supervisory guidance highlighting the importance of stress testing at banking organisations as "an ongoing risk management practice that supports a banking organisation's forward-looking assessment of its risks and better equips it to address a range of adverse outcomes".
The recent financial crisis underscored the need for banking organisations to incorporate stress testing into their risk management practices, demonstrating that banking organisations unprepared for particularly adverse events and circumstances can suffer acute threats to their financial condition and viability.
This guidance builds upon previously issued supervisory guidance that discusses the uses and merits of stress testing in specific areas of risk management outlining general principles for a satisfactory stress testing framework and describes various stress testing approaches and how stress testing should be used at various levels within an organisation.
The guidance also discusses the importance of stress testing in capital and liquidity planning and the importance of strong internal governance and controls as part of an effective stress-testing framework.
The guidance does not implement the stress testing requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) or in the Federal Reserve Board's capital plan rule that apply to certain companies, as those requirements have been or are being implemented through separate proposals by the respective agencies.
However, the agencies expect that banking organisations with total consolidated assets of more than $10bn would follow the principles in the guidance - as well as other relevant supervisory guidance - when conducting stress testing in accordance with the Dodd-Frank Act, the capital plan rule, and other statutory or regulatory requirements.
The guidelines can be found here.
Other stories you may find of interest:
A very British Complex
Greater complexity leads to greater risks for banks according to Professor Simon Collinson, Warwick Business School and the Simplicity Partnership
Impacting on investment
With emerging markets looking for investment, Simon Miller looks at the rise of impact investment and what risks entails in this socially aware vehicle
Journey’s end for Solvency II?
Solvency II, the long-mooted new capital adequacy regime for Europe’s insurers, is nearing implementation. Graham Buck reviews its progress
