June 27, 2024 - Last Friday, the Federal Reserve Board advanced its objective of improving visibility on banks’ exposure to nonbanks with a proposal seeking more granular data in its FR Y-14A/Q/M Capital Assessments and Stress Testing Reports (“the Reports”). The Reports are filed monthly, quarterly and annually and used to set banks’ stress capital buffers requirements, support supervisory stress test models, and collect company-run stress test models. The data in the Reports is also used to support bank supervision and regulation.

The proposal applies to bank holding companies, U.S. intermediate holding companies of foreign banking companies, and covered savings and loan holding companies with at least $100 billion in total consolidated assets. Comments are due by August 20, 2024.

Below we highlight key elements of the proposal.

Exploratory Market Shocks. The proposal requires banks subject to the global market shock (i.e., adverse loss scenario) component of the supervisory stress test to submit relevant data with respect to all market shocks that the Fed may conduct each year, including any exploratory market shocks. The Fed estimates that it will conduct two exploratory market shocks per year, but the number may vary.

Collection of Supplemental CECL Information. The proposal removes the collection of information reflecting current expected credit losses (CECL) since it is a one-time required submission.

Reporting Treatment of Nondepository Financial Institutions: The proposal notes that because the Reports do not currently require banks to report certain financial information of nondepository financial institution (NDFI) borrowers, less than half of the total committed exposure on the corporate loan schedule include data on the financial health of the borrower, and this lack of data may result in stress test models not accurately capturing the risk of those loans and impact the consistency of monitoring those exposures. The proposal requires reporting financial data including total assets, total liabilities, short term debt and net income for NDFI borrowers. Additionally, the Fed proposes adding a “NDFI Entity Type” field to specify the type of borrower (e.g., credit fund, broker-dealer, special purpose entity).

Reporting of Financial Sponsors. The proposal aims to increase insight into equity investments in the corporate sector where NDFIs are increasing activities. It introduces new fields to capture whether a borrower is controlled by a financial sponsor, and the sponsor’s legal identity in such instances.    

Additional Options for the Reporting of Security Type. The proposal states that collateral is a key risk transmitter from NDFIs to banks and provides insight into NDFIs’ activities. Due to a lack of granularity around loan collateral, the proposal adds 12 response options (for a total of 19) to the “Security Type” field and implements an “Other Security Type.”

Reporting of Fee Information. The Fed believes that a loan’s fees can be a source of lender income and risk (in addition to the loan’s interest rate) and that lack of reported fee data impacts its supervisory risk assessment process. To address this information gap, the proposal adds five fields to capture the fee structure of facilities.

Reporting of Collateral Market Value. The proposal modifies the “Collateral Market Value” field to require reporting of collateral valuations for all loans with collateral-based commitments. This modification broadens the current requirement for this field to be reported only for market-based collateral. 

Loan Covenant Violation Information. Because the Reports do not capture covenants, the proposal introduces a field to capture whether a loan covenant exists, whether the covenant has been violated and, in such instances, whether the credit agreement has been amended.

Unused Commitments. For reporting consistency across banks and to eliminate ambiguous language in the Reports about how to account for undrawn commitments, the proposal clarifies which commitments must be reported.

In addition to providing for additional information on lending, the proposed changes would improve the timeliness and coverage of the Fed’s collections of counterparty credit risk data, remove data fields that are considered no longer necessary, and make other minor revisions and structural clarifications.

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