Section 165 of Dodd‐Frank requires the Federal Reserve Board (FRB) to conduct supervisory stress tests of financial institutions. The stress tests mandated by Section 165 are intended to allow the FRB to evaluate the potential effects of adverse economic and financial market conditions on a company’s capital and therefore to measure the ability of the company to absorb losses.

The FRB plans to build on past and continuing programs, specifically the 2009 SupervisoryCapital Assessment Program (SCAP) and the 2010 Comprehensive Capital Analysis and Review (CCAR), to implement Section 165. The FRB’s proposed rule requires two forms of stress testing: supervisory stress tests conducted by the FRB and internal stress tests conducted by the companies.

The FRB’s Annual Supervisory Stress Tests

The FRB will conduct annual supervisory stress tests of all bank holding companies with $50 billion or more in assets and all FSOC‐designated nonbanks (covered companies). The forward-looking tests will project revenues, losses, reserves, and capital levels under three scenarios: baseline, adverse, and severely adverse.

The FRB will publish forward‐looking summary results for each covered company and provide feedback to the company. The projected results are to be reported on a quarterly basis for nine quarters. Covered companies must use the feedback to inform their capital plans and when making changes to their capital structures. Additionally, a covered company must update its resolution plan as the FRB sees appropriate.

Company‐Run Stress Tests

The FRB will also require companies to conduct internal stress tests. All covered companies and U.S. bank holding companies and state member banks with more than $10 billion in assets must perform these annually. These stress tests will use the criteria and scenarios designed by the FRB for the supervisory stress tests. Companies will be required to report their results to the FRB and publicly announce summary results. The FRB will provide feedback that companies must consider when changing their capital plans and capital structures.

Covered companies are also required to conduct a second internal stress test each year. The second stress test must feature baseline, adverse, and severely adverse scenarios that the company develops itself.

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