The Federal Reserve Board is seeking feedback on a proposal to reduce the volatility of the capital requirements and change the bank annual stress test.
It is part of the Fed’s commitment to make changes to its annual stress test for banks. The board has determined that the stress test should be modified in important respects to improve its resiliency.
The Board’s stress test evaluates the resilience of large banks by estimating their losses, revenue, and capital levels under a hypothetical severe recession scenario. Due to the changing hypothetical nature of the test, the results also change and introduce volatility each year.
The results of the stress test help determine the stress capital buffer (SCB) placed on banks. The capital buffer is the amount of capital large banks must hold to absorb losses.
This proposal suggests several changes. First, it would average stress test results over two consecutive years to reduce the year-over-year changes in the capital requirements that result from the stress test.
In addition, the proposal would delay the annual effective date of the stress capital buffer requirement from Oct. 1 to Jan. 1 of the following year. This would give banks additional time to adjust to their new capital requirements.
Finally, the proposal would make targeted changes to streamline the Board’s stress test-related data collection. These proposed changes are not designed to materially affect overall capital requirements.
Comments on this proposal are due 60 days after publication in the Federal Register.
Later this year, the Board will offer additional changes to improve the transparency of the stress test. Those proposed changes include disclosing and seeking public comment on the models that determine the hypothetical losses and revenue of banks under stress and ensuring that the public can comment on the hypothetical scenarios used for the annual stress test before the scenarios are finalized.