12 CFR 252.56 – Methodologies and practices
(a) Potential impact on capital. In conducting a stress test under § 252.54, for each quarter of the planning horizon, a covered company must estimate the following for each scenario required to be used:
(1) Losses, pre-provision net revenue, provision for credit losses, and net income; and
(2) The potential impact on the regulatory capital levels and ratios applicable to the covered bank, and any other capital ratios specified by the Board, and in doing so must:
(i) Incorporate the effects of any capital action over the planning horizon and maintenance of an allowance for loan losses or adjusted allowance for credit losses, as appropriate, for credit exposures throughout the planning horizon; and
(ii) Exclude the impacts of changes to a firm’s business plan that are likely to have a material impact on the covered company’s capital adequacy and funding profile.
(b) Assumptions regarding capital actions. In conducting a stress test under § 252.54, a covered company is required to make the following assumptions regarding its capital actions over the planning horizon:
(1) The covered company will not pay any dividends on any instruments that qualify as common equity tier 1 capital;
(2) The covered company will make payments on instruments that qualify as additional tier 1 capital or tier 2 capital equal to the stated dividend, interest, or principal due on such instrument;
(3) The covered company will not make a redemption or repurchase of any capital instrument that is eligible for inclusion in the numerator of a regulatory capital ratio; and
(4) The covered company will not make any issuances of common stock or preferred stock.
(c) Controls and oversight of stress testing processes—(1) In general. The senior management of a covered company must establish and maintain a system of controls, oversight, and documentation, including policies and procedures, that are designed to ensure that its stress testing processes are effective in meeting the requirements in this subpart. These policies and procedures must, at a minimum, describe the covered company’s stress testing practices and methodologies, and processes for validating and updating the company’s stress test practices and methodologies consistent with applicable laws and regulations.
(2) Oversight of stress testing processes. The board of directors, or a committee thereof, of a covered company must review and approve the policies and procedures of the stress testing processes as frequently as economic conditions or the condition of the covered company may warrant, but no less than each year a stress test is conducted. The board of directors and senior management of the covered company must receive a summary of the results of any stress test conducted under this subpart.
(3) Role of stress testing results. The board of directors and senior management of each covered company must consider the results of the analysis it conducts under this subpart, as appropriate:
(i) As part of the covered company’s capital plan and capital planning process, including when making changes to the covered company’s capital structure (including the level and composition of capital);
(ii) When assessing the covered company’s exposures, concentrations, and risk positions; and
(iii) In the development or implementation of any plans of the covered company for recovery or resolution.