Federal Reserve Board finalizes changes to enhance the transparency and public accountability of its stress test and reduce volatility in its stress test-related capital requirements

The Federal Reserve Board concluded modifications on Wednesday to bolster transparency and public accountability of its stress test and lessen volatility in related capital requirements. The two final regulations closely mirror the proposals from 2025. The Board also solicited input on a proposal to better identify disparities in banks' business models that generate fee income.

The Board performs stress tests to guarantee that large banks are adequately capitalized and capable of lending to households and businesses during a severe recession. In December 2024, the Board announced plans to modify the test to enhance its resilience. Vice Chair for Supervision Michelle W. Bowman stated that the stress test is a crucial element of our regulatory capital framework.

The changes today maintain its resilience by guaranteeing it is transparent, granular, and risk-sensitive. The public will now have a greater assurance that banks' taken risks will be accurately reflected in their stress test losses and capital requirements. The first final rule obligates the Board to solicit public input annually regarding the stress test scenarios and any significant model modifications.

It also updates the framework guiding the design of hypothetical scenarios and adopts the models for the 2027 stress test. Moreover, the final rule adjusts the stress test schedule. The final rule also revises the global market shock component, a set of shocks to specific market components applied to banks with substantial trading books.

These banks will now be evaluated against two global market shock components annually, and the Board will use the shock that generates the greatest losses for each firm to calculate the firm's stress test outcomes. The second final rule necessitates the Board to average the results from the two most recent annual supervisory stress tests for firms subject to stress testing in both years when calculating stress capital buffer requirements.

The Board will commence averaging stress capital buffer requirements in 2028 to ensure only models incorporating public input are used in the calculation. The proposal seeks public comment on a modification to the Board's noninterest income model to enhance the stress test's capacity to capture business model diversity across firms.

If enacted, these changes would likely reduce year-over-year volatility in capital requirements by approximately 50 percent and are not anticipated to substantially affect total capital requirements.