12 CFR 252.158 – Capital stress testing requirements for foreign banking organizations with combined U.S. assets of $100 billion or more
(a) Definitions. For purposes of this section, the following definitions apply:
(1) Eligible asset means any asset of the U.S. branch or U.S. agency held in the United States that is recorded on the general ledger of a U.S. branch or U.S. agency of the foreign banking organization (reduced by the amount of any specifically allocated reserves held in the United States and recorded on the general ledger of the U.S. branch or U.S. agency in connection with such assets), subject to the following exclusions, and, for purposes of this definition, as modified by the rules of valuation set forth in paragraph (a)(1)(ii) of this section.
(i) The following assets do not qualify as eligible assets:
(A) Equity securities;
(B) Any assets classified as loss at the preceding examination by a regulatory agency, outside accountant, or the bank’s internal loan review staff;
(C) Accrued income on assets classified loss, doubtful, substandard or value impaired, at the preceding examination by a regulatory agency, outside accountant, or the bank’s internal loan review staff;
(D) Any amounts due from the home office, other offices and affiliates, including income accrued but uncollected on such amounts;
(E) The balance from time to time of any other asset or asset category disallowed at the preceding examination or by direction of the Board for any other reason until the underlying reasons for the disallowance have been removed;
(F) Prepaid expenses and unamortized costs, furniture and fixtures and leasehold improvements; and
(G) Any other asset that the Board determines should not qualify as an eligible asset.
(ii) The following rules of valuation apply:
(A) A marketable debt security is valued at its principal amount or market value, whichever is lower;
(B) An asset classified doubtful or substandard at the preceding examination by a regulatory agency, outside accountant, or the bank’s internal loan review staff, is valued at 50 percent and 80 percent, respectively;
(C) With respect to an asset classified value impaired, the amount representing the allocated transfer risk reserve that would be required for such exposure at a domestically chartered bank is valued at 0 and the residual exposure is valued at 80 percent; and
(D) Real estate located in the United States and carried on the accounting records as an asset are valued at net book value or appraised value, whichever is less.
(2) Liabilities of all U.S. branches and agencies of a foreign banking organization means all liabilities of all U.S. branches and agencies of the foreign banking organization, including acceptances and any other liabilities (including contingent liabilities), but excluding:
(i) Amounts due to and other liabilities to other offices, agencies, branches and affiliates of such foreign banking organization, including its head office, including unremitted profits; and
(ii) Reserves for possible loan losses and other contingencies.
(3) Pre-provision net revenue means revenue less expenses before adjusting for total loan loss provisions.
(4) Stress test cycle has the same meaning as in subpart F of this part.
(5) Total loan loss provisions means the amount needed to make reserves adequate to absorb estimated credit losses, based upon management’s evaluation of the loans and leases that the company has the intent and ability to hold for the foreseeable future or until maturity or payoff, as determined under applicable accounting standards.
(b) In general. (1) A foreign banking organization subject to this subpart and that has a U.S. branch or U.S. agency must:
(i) Be subject on a consolidated basis to a capital stress testing regime by its home-country supervisor that meets the requirements of paragraph (b)(2) of this section;
(ii) Conduct such stress tests or be subject to a supervisory stress test and meet any minimum standards set by its home-country supervisor with respect to the stress tests; and
(iii) Provide to the Board the information required under paragraph (c) of this section.
(2) The capital stress testing regime of a foreign banking organization’s home-country supervisor must include:
(i) A supervisory capital stress test conducted by the foreign banking organization’s home-country supervisor or an evaluation and review by the foreign banking organization’s home-country supervisor of an internal capital adequacy stress test conducted by the foreign banking organization, according to the frequency specified in paragraph (b)(2)(A) or (B):
(A) If the foreign banking organization is not a Category IV foreign banking organization, at least annually; or
(B) If the foreign banking organization is a Category IV foreign banking organization, at least biennially; and
(ii) Requirements for governance and controls of stress testing practices by relevant management and the board of directors (or equivalent thereof) of the foreign banking organization;
(c) Information requirements—(1) In general. A foreign banking organization subject to this subpart must report to the Board by January 5 of each calendar year, unless such date is extended by the Board, summary information about its stress-testing activities and results, including the following quantitative and qualitative information:
(i) A description of the types of risks included in the stress test;
(ii) A description of the conditions or scenarios used in the stress test;
(iii) A summary description of the methodologies used in the stress test;
(iv) Estimates of:
(A) Aggregate losses;
(B) Pre-provision net revenue;
(C) Total loan loss provisions;
(D) Net income before taxes; and
(E) Pro forma regulatory capital ratios required to be computed by the home-country supervisor of the foreign banking organization and any other relevant capital ratios; and
(v) An explanation of the most significant causes for any changes in regulatory capital ratios.
(2) Additional information required for foreign banking organizations in a net due from position. If, on a net basis, the U.S. branches and agencies of a foreign banking organization subject to this subpart provide funding to the foreign banking organization’s non-U.S. offices and non-U.S. affiliates, calculated as the average daily position over a stress test cycle for a given year, the foreign banking organization must report the following information to the Board by January 5 of each calendar year, unless such date is extended by the Board:
(i) A detailed description of the methodologies used in the stress test, including those employed to estimate losses, revenues, and changes in capital positions;
(ii) Estimates of realized losses or gains on available-for-sale and held-to-maturity securities, trading and counterparty losses, if applicable; and loan losses (dollar amount and as a percentage of average portfolio balance) in the aggregate and by material sub-portfolio; and
(iii) Any additional information that the Board requests.
(d) Imposition of additional standards for capital stress tests. (1) Unless the Board otherwise determines in writing, a foreign banking organization that does not meet each of the requirements in paragraph (b)(1) and (2) of this section must:
(i) Maintain eligible assets in its U.S. branches and agencies that, on a daily basis, are not less than 108 percent of the average value over each day of the previous calendar quarter of the total liabilities of all U.S. branches and agencies of the foreign banking organization; and
(ii) To the extent that a foreign banking organization has not established a U.S. intermediate holding company, conduct an annual stress test of its U.S. subsidiaries to determine whether those subsidiaries have the capital necessary to absorb losses as a result of adverse economic conditions; and report to the Board on an annual basis a summary of the results of the stress test that includes the information required under paragraph (b)(1) of this section and any other information specified by the Board.
(2) An enterprise-wide stress test that is approved by the Board may meet the stress test requirement of paragraph (d)(1)(ii) of this section.
(3) Intragroup funding restrictions or liquidity requirements for U.S. operations. If a foreign banking organization does not meet each of the requirements in paragraphs (b)(1) and (2) of this section, the Board may require the U.S. branches and agencies of the foreign banking organization and, if the foreign banking organization has not established a U.S. intermediate holding company, any U.S. subsidiary of the foreign banking organization, to maintain a liquidity buffer or be subject to intragroup funding restrictions.
(e) Notice and response. If the Board determines to impose one or more conditions under paragraph (d)(3) of this section, the Board will notify the company before it applies the condition, and describe the basis for imposing the condition. Within 14 calendar days of receipt of a notification under this paragraph, the company may request in writing that the Board reconsider the requirement. The Board will respond in writing to the company’s request for reconsideration prior to applying the condition.