The Federal Reserve Board finalized changes to enhance the transparency and public accountability of its bank stress test and reduce volatility in the stress test capital requirements.
The stress tests are conducted to ensure that large banks are sufficiently capitalized and able to lend to households and businesses even in a severe recession. The new final stress test rules are largely similar to the rules proposed back in 2025.
“The stress test is an essential component of our regulatory capital framework,” Fed Vice Chair for Supervision Michelle Bowman said. “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, it makes several adjustments to the stress test calendar.
Also, the final rule 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. The Fed will use the shock that produces the largest losses for each firm to calculate the firm’s stress test results.
The second final rule requires the Fed, when calculating stress capital buffer requirements, to average the results from the two most recent annual supervisory stress tests for firms subject to the stress test in both years. The Fed will begin averaging stress capital buffer requirements in 2028 to ensure that only models incorporating public input are used in the calculation.
The proposal would request public comment on a revision to the Board’s non-interest income model that would improve the stress test’s ability to capture business model diversity across firms. If adopted, these adjustments would replace the current non-interest income model that projects each bank’s fee income under stress. Comments are due 60 days after publication in the Federal Register.
These changes are likely to reduce year-over-year volatility in capital requirements by approximately 50 percent.