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

The Federal Reserve Board finalized two rules to enhance transparency and public accountability in its annual stress tests for large banks. The changes follow proposals from 2025 and aim to ensure the tests remain resilient and risk-sensitive. The Board conducts these tests to verify that banks maintain sufficient capital to lend during severe economic downturns. Vice Chair for Supervision Michelle W. Bowman emphasized the importance of transparency in reflecting risks accurately in stress test losses and capital requirements.

The first rule requires annual public input on stress test scenarios and model changes, with updates to the scenario design framework. It also adopts models for the 2027 stress test and adjusts the testing calendar. The rule also modifies the global market shock component, now requiring banks with large trading books to be tested against two shock components annually. The Board will use the shock that produces the largest losses for each firm in its calculations.

The second rule mandates averaging results from the two most recent annual supervisory stress tests when calculating stress capital buffer requirements. This change will take effect in 2028 to ensure only models incorporating public input are used. The Board also proposed revising the noninterest income model to better capture differences in banks' business models generating fee income.

Together, these adjustments are expected to reduce year-over-year volatility in capital requirements by approximately 50 percent. The Federal Reserve stated that the changes will not materially affect aggregate capital requirements. The public may submit comments on the proposed noninterest income model revision for 60 days after publication in the Federal Register.