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Banks stressed about stress tests

Stress tests required under the 2010 Dodd-Frank Act have risk and compliance managers at banks across America on edge.

The FDIC requires that covered financial institutions with consolidated assets between $10 billion and $50 billion conduct annual stress tests under a scenario of economic distress, Advanced Trading reports.

The final rule pushed the compliance date for model submission to October 2013 and delayed public disclosure provisions until the completion of the 2014 data-collection cycle. The delay applies to U.S. banks or subsidiaries that did not participate in the Supervisory Capital Assessment Program.

The stress tests are designed to monitor the capital levels of institutions for adequacy in protecting against economic blows. Covered financial institutions will be held responsible for systems modeling beginning in 2013, according to Advanced Trading.

As required under Dodd-Frank, the FDIC is coordinating the rules, scenarios, reporting and disclosure with the Federal Reserve Board, Office of the Comptroller of the Currency and Federal Insurance Office to ensure regulatory consistency.

Regulatory guidance indicates that capital adequacy will be a key factor used in analysis of bank stress tests. The stress test rule requires a minimum of three model-based economic scenarios, including baseline, adverse and severely adverse, Advanced Trading reports.

The FDIC expects the stress test scenarios to be revised on a yearly basis in order to ensure that the scenarios remain relevant under prevailing economic conditions, thereby including changing risks and vulnerabilities in the scenarios.

Firms with the appropriate systems in place should be able to relax when the next round of stress tests begins, according to Advanced Trading.

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