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Are Stress Tests Still Important? To the OCC, They Are

several-banksStress tests have come under some scrutiny lately as to whether or not they are providing any new, relevant information seven years after the Federal Reserve disclosed the results of the first stress tests.

To the Office of the Comptroller of the Currency (OCC), however, stress tests are still relevant and remain high on the OCC's list of supervisory priorities for the rest of Fiscal Year 2016, according to the OCC's mid-cycle report on its Committee on Bank Supervision’s operating plan.

The Federal Reserve has said it will announce the results of the stress tests before June 30, 2016. Stress testing, or testing the banks’ ability to remain well-capitalized during severely adverse economic situations, is one of several initiatives the OCC will emphasize for the remainder of FY2016, which began on October 1, 2015, and will conclude on September 30, 2016. The Fed has been disclosing stress test results since 2009, right after several large financial institutions required government bailouts to stay afloat.

In January, the Fed released a new set of supervisory scenarios for both the Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank stress test exercises. The CCAR’s purpose is to determine the adequacy of banks’ capital planning processes, while the Dodd-Frank tests assess the firms to determine if their capital levels are sufficient to absorb losses and still lend to households and businesses during economic shocks.

“In adjusting the scenarios for our yearly stress testing program, we strive to assess the resilience of the nation's largest banks in a variety of potential adverse environments,” Fed Governor Daniel K. Tarullo said. “It is important that the tests not to be too predictable from year to year.”

Other areas of emphasis on the list included compliance, operational resiliency, interest rate risk, and credit risk management.

“The OCC’s operating plan creates the foundation for developing individual bank supervisory strategies and policy initiatives.

Grace Dailey, OCC

The report includes a list of key actions the OCC has completed through the first half of FY2016, such as balancing prudent credit risk management with the ability to reduce barriers to financing homes in communities that have been targeted for revitalization; issuing the OCC’s 21st annual Survey of Credit Underwriting Practices report, highlighting continued easing underwriting standards and increasing credit risk; issuing the eighth OCC Semiannual Risk Perspective report, discussing emerging risk that OCC-supervised banks face and what the OCC’s supervisory priorities will be; and implementing the Dodd-Frank Act and developing enhanced capital and liquidity rules.

According to the announcement, the OCC uses the supervisory plan to guide supervisory priorities, planning, and resource allocations.

“The OCC’s operating plan creates the foundation for developing individual bank supervisory strategies and policy initiatives,” said Senior Deputy Comptroller for Bank Supervision Policy and Chief National Bank Examiner Grace Dailey. “Publishing those results promotes transparency and frames our expectations of national banks and federal savings associations going forward.”

The OCC will release the supervisory priorities that form the basis for developing FY2017’s supervisory strategies sometime this summer.

“The OCC will continue to adjust supervisory strategies as appropriate, given meaningful changes in emerging risks and supervisory priorities,” the report stated.

Click here to view the complete status report.

About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.
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