Business & Markets
Fed finalizes bank stress-test changes designed to smooth capital requirements
The Fed estimates the averaging rule will cut year-to-year volatility in stress capital requirements by about half, without materially changing aggregate capital requirements. A separate model revision remains only a proposal.
Executive summary
- Two rules finalized: The Federal Reserve finalized changes to public disclosure and comment around its stress-test scenarios and models, and a separate rule that averages results from a bank's two most recent annual tests when calculating its stress capital buffer.[1][2]
- Expected effect: The Fed estimates averaging would reduce year-over-year volatility in stress capital requirements by roughly 50%, while not materially changing aggregate capital requirements. That is the agency's estimate, not an observed result from the new rule.[1][2]
- A proposal remains open: A related change to the model for noninterest income is still proposed and open for comment; it was not part of the two final rules.[1]
The Federal Reserve finalized two rules on Sept. 30 that change how it designs and communicates its annual supervisory stress test for large banks. One rule expands public information about the scenario-design process and supervisory models and creates opportunities for public input on scenarios and material model changes.[1][2]
The stress test applies a hypothetical severe downturn to estimate bank losses and capital levels. Its scenarios are not forecasts. The resulting stress capital buffer is one part of the capital that covered banks must hold, so choices about models and scenario design can affect the size and year-to-year movement of those requirements.[1]
The transparency rule responds to debate about the fairness and predictability of the test. The Fed said the final rules were largely similar to its earlier proposals; Reuters reported that the changes follow legal challenges and criticism from banks over stress-test transparency and swings in capital requirements.[1][2]
The second final rule averages stress-test results from a bank's two most recent annual tests when calculating its stress capital buffer, for firms tested in both years. The Fed says the approach is intended to reduce volatility caused by changes in test administration, scenario design and model updates.[1][2]
The Board estimates the change will reduce year-over-year volatility in the stress capital buffer by about 50% and will not materially affect aggregate capital requirements. Those are the regulator's modeled estimates; the rule's effects on individual banks will depend on their test results and exposures.[1]
The release also discusses a separate proposed revision to the noninterest-income model for the 2027 test. That measure is not final: the Fed opened a comment period that runs for 60 days after Federal Register publication.[1]
The package changes the process and calculation used to set an important capital buffer; it does not eliminate the annual stress test or replace bank-level capital requirements. The Fed's own estimate says aggregate capital would not materially change, even as annual movements in requirements become less volatile.[1][2]
The practical effects will become clearer as the Board publishes the information and applies the new calculation. Public scrutiny may make the models easier to assess, while averaging could temper sharp changes in individual banks' buffers. The separate noninterest-income proposal remains subject to comment and could still change.[1]