Federal regulators have adopted final guidelines setting out how financial institutions should carry out their stress testing.

On August 26, the Office of the Superintendent of Financial Institutions published a draft version of the guidelines, which sets out its expectations on the use of stress testing by all federally regulated financial institutions.

On Wednesday, OSFI published the guideline in final form, after incorporating industry comments.

OSFI reports that it received a sizable number of comments from banks, insurance companies and actuaries and that it has modified the guideline in response to the comments. The primary changes deal with the timing of the guideline’s implementation.

The draft guideline suggested that an insurer’s annual dynamic capital adequacy testing (DCAT) would be available to the board of directors no later than six months after year end. This was the most commented on aspect of the guideline, OSFI says, noting that commenters pointed out that requiring this to be completed in that time frame “does not mesh well with many insurers’ planning cycles, and that uncoupling DCAT from the planning cycle reduces its effectiveness as a management tool”.

“We clarified the requirement by eliminating a specific timeline for the annual DCAT and emphasizing that DCAT and stress testing are complementary processes which each institution needs to complete in a way which will maximize their benefit, and that more frequent stress testing supports the integration of the DCAT process with the finalization of an annual business plan by providing timely inputs based on current information,” OSFI says.

Additionally, OSFI was planning to implement the guideline in late 2009. However, it says that industry associations suggest immediate full implementation of the guideline is not reasonable as it may require significant investment in infrastructure and information systems.

As a result, OSFI now expects institutions to assess their stress testing practices against the principles set out in the guideline “as soon as practicable” and, where gaps have been identified, that institutions develop action plans to improve their practices “in a reasonable time frame”. It adds that institutions should communicate the results of such assessments and any action plans to the regulator during the first half of calendar 2010.

IE