§ 1238.4 - Methodologies and practices.

§ 1238.4 Methodologies and practices.

(a) Potential impact. Except as noted in this subpart, in conducting a stress test under § 1238.3, each regulated entity Enterprise shall calculate how each of the following is affected during each quarter of the stress test planning horizon, for each scenario:

(1) Potential losses, pre-provision net revenues, allowance for loan losses, and future pro forma capital positions over the planning horizon; and

(2) Capital levels and capital ratios, including regulatory capital and net worth, each Bank's leverage and permanent capital ratios, and any other capital ratios , specified by FHFA.

(b) Planning horizon. Each regulated entity Enterprise must use a planning horizon of at least nine quarters over which the impact of specified scenarios would be assessed.

(c) Additional analytical techniques. If FHFA determines that the stress test methodologies and practices of a regulated entity an Enterprise are deficient, FHFA may determine that additional or alternative analytical techniques and exercises are appropriate for a regulated entity an Enterprise to use in identifying, measuring, and monitoring risks to the financial soundness of the regulated entityEnterprise, and require a regulated entity an Enterprise to implement such techniques and exercises in order to fulfill the requirements of this part. In addition, FHFA will issue guidance annually to describe the baseline , adverse, and severely adverse scenarios, and methodologies to be used in conducting the annual stress test.

(d) Controls and oversight of the stress testing processes.

(1) The appropriate senior management of each regulated entity Enterprise must ensure that the regulated entity Enterprise establishes and maintains a system of controls, oversight, and documentation, including policies and procedures, designed to ensure that the stress testing processes used by the regulated entity Enterprises are effective in meeting the requirements of this part. These policies and procedures must, at a minimum, describe the regulated entityEnterprise's testing practices and methodologies, validation and use of stress test results, and processes for updating the regulated entityEnterprise's stress testing practices consistent with relevant supervisory guidance;

(2) The board of directors, or a designated committee thereof, shall review and approve the policies and procedures established to comply with this part as frequently as economic conditions or the condition of the regulated entity Enterprise warrants, but at least annually; and

(3) Senior management of the regulated entity Enterprise and each member of the board of directors shall receive a summary of the stress test results.

[85 FR 16530, Mar. 24, 2020]