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

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 on Wednesday finalized changes to enhance the transparency and public accountability of its stress test and reduce volatility in its stress test-related capital requirements. The two final rules are largely similar to the proposed rules from 2025. The Board also requested comment on a proposal to better capture differences in banks' business models to generate fee income.

The Board conducts stress tests to ensure that large banks are sufficiently capitalized and able to lend to households and businesses even in a severe recession. In December 2024, the Board announced it would modify the test to improve its resilience.

"The stress test is an essential component of our regulatory capital framework," said Vice Chair for Supervision Michelle W. Bowman. "Today's changes preserve its resilience by ensuring that it is transparent, granular, and risk-sensitive. The public will now have greater assurance that the risks banks take will be reflected appropriately in their stress test losses and their capital requirements."

The first final rule requires the Board to invite public input annually on the stress test scenarios and any material model changes. It also updates the framework that guides the design of the hypothetical scenarios and adopts the models that will be used for the 2027 stress test. In addition, the final rule makes several adjustments to the stress test calendar. The final rule also updates the global market shock component, which is a set of shocks to specific market components applied to banks with large trading books. These banks will now be tested against two global market shock components each year, and the Board will use the shock that produces the largest losses for each firm to calculate the firm's stress test results.