Fed to Consider Overhauling Bank Stress Testing, Capital Frameworks

Federal Reserve Vice Chair for Supervision Michelle Bowman said that the Fed board will consider final changes to its bank stress testing framework in the coming weeks. The proposals would make the models more transparent and reduce swings in the capital requirements that result from annual tests. The board has yet to approve them.

Speaking in London, Bowman said one rule would require the Fed to publish details of its models and how it designs the hypothetical economic scenarios used to test large banks. Disclosures would include model equations, assumptions and limitations, giving the public more opportunity to assess the process. Bowman’s stress testing remarks also outlined a second rule that would calculate a bank’s stress capital buffer using its two most recent annual test results, instead of one. The new buffer would take effect Jan. 1, rather than Oct. 1, giving banks more time to comply.

Bowman said the two changes could cut volatility in the buffer by half without materially changing aggregate required capital. She expects the board to finalize separate risk-based capital reforms and changes to the surcharge for global systemically important banks before year-end.

She also plans to recommend a proposal for the 2027 stress test that would seek public comment on a revised model for banks’ fee and trading revenue. That model would account for differences among businesses such as wealth management, investment banking and market making.

In separate remarks, Bowman discussed an independent review of Silicon Valley Bank’s 2023 collapse. She said Fed supervisors knew, or should have known, about the bank’s vulnerabilities by March 2022 but failed to act promptly. The review identified a “long-standing culture of risk aversion” as one contributor to that delay.

Bowman said future supervisory stress tests should help examiners identify firm-specific vulnerabilities before risks emerge.