[1]The Third Federal Savings and Loan Association of Cleveland [2], a wholly owned subsidiary of TFS Financial Corporation, recently reported the results of its 2015 company-run stress test [3] that is conducted in accordance with regulations of the Board of Governors of the Federal Reserve System [4] and the Office of the Comptroller of the Currency [5] (OCC) under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“These company-run stress tests are designed to help assess whether financial institutions have sufficient capital to absorb losses and support operations using a hypothetical stressed scenario described by the Federal Reserve, over a nine-quarter projection period from October 1, 2014 to December 31, 2016,” Third Federal Savings and Loan said in a press release.
The Association also noted that compared to institutions with assets of $50 billion or more, the stress testing requirements and expectations are significantly lower for institutions with assets between $10 billion and $50 billion. Meduim-sized companies, including the Association, are not required to do the Federal Reserve’s supervisory-run stress tests or the Federal Reserve’s annual Comprehensive Capital Assessment and Review. They are also not required to submit an annual capital plan or subject to a supervisory approval or denial of their stress test results.
The hypothetical scenario involves economic conditions that are more adverse than currently expected by the Federal Reserve or the Association and therefore investors should not rely on these results as forecasts of expected or most likely financial results or capital ratios for the Association or the Company.
The Association revealed that loan losses within the company in the severely adverse scenario totaled $129,075, while pre-provision net revenue (PPNR) totaled $72,509. Provision expenses reached $206,202 and net loss totaled $88,463.
“In this scenario, economic factors in the United States reflect a contracting economy marked with rising unemployment, widening credit spreads, low treasury yields, declining asset prices and near-term inflationary pressures brought about by a considerable rise in the price of oil,” the Association reported. “While the Association does not believe this economic environment has a high probability of occurrence, the test demonstrates our ability to remain well-capitalized after absorbing anticipated losses during a period of deep recessionary effects in the economy.”
A description of the risks included in the company-run stress test follows:
- Credit- The risk that an extension of credit to a borrower will result in the inability of the borrower to meet the terms of the obligation.
- Liquidity- The risk that attrition of the retail deposit base would result in an inability to fund lending activity through alternative channels.
- Market- The risk that market interest rates would adversely affect fair market valuation assessments to our available-for-sale securities portfolio.
- Operational- The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.