Fed Finalizes Stress Test Overhaul to Curb Capital Swings
The Federal Reserve finalized changes intended to make its annual bank stress tests more transparent, publicly accountable and less likely to produce sharp year-to-year swings in capital requirements.
The changes, largely consistent with proposals issued in 2025, affect the supervisory tests the Fed uses to assess whether large banks can maintain adequate capital and continue lending through a severe economic downturn. The central bank said the revisions are not expected to materially change aggregate capital requirements but could reduce annual volatility in stress-test-related capital requirements by about 50%.
Under the first final rule, the Fed will seek public comment each year on the hypothetical economic and financial scenarios used in the tests, as well as on material changes to the underlying models. The rule also updates the framework for scenario design, establishes the models for the 2027 stress test and adjusts the testing calendar.
For banks with large trading operations, the Fed also revised its global market shock component. Those institutions will now be tested against two separate market-shock scenarios annually. The Fed will use the scenario generating the larger losses for each bank when determining its stress-test results. The change is designed to make the tests more sensitive to risks tied to trading activities and market conditions, according to the Fed.
A second final rule changes how the stress capital buffer is calculated. Beginning in 2028, the Fed will average the results of the two most recent annual supervisory stress tests for banks that participated in both years. The delayed implementation is intended to ensure that only models subject to public input are used in the averaging process.
“The stress test is an essential component of our regulatory capital framework,” Vice Chair for Supervision Michelle Bowman said. “Today’s changes preserve its resilience by ensuring that it is transparent, granular, and risk-sensitive.”
The Fed also requested comment on a proposed revision to its noninterest-income model, which projects fee income under stress. The proposal aims to better account for differences in banks’ business models and would replace the current model if adopted. Comments will be due 60 days after publication in the Federal Register.
The revisions follow the Fed’s December 2024 announcement that it would reconsider elements of the stress-test framework after legal and industry scrutiny of the process.