Fed finalizes rules to boost stress-test transparency and smooth capital buffers

The Federal Reserve Board finalized two rules that modify the stress-test framework for large banks subject to the supervisory stress test. The first rule requires the Board to solicit public input each year on stress-test scenarios and material model changes, updates the scenario-design framework, adopts the models that will be used for the 2027 stress test, and revises the stress-test calendar. It also expands the global market shock component so that banks with large trading books are tested against two shock sets each year, with the larger loss applied to each firm.

The second rule directs the Board to calculate stress capital buffer requirements by averaging the outcomes of the two most recent annual supervisory stress tests for firms that participated in both years. The averaging will begin in 2028, ensuring that only models that have incorporated public input are used in the buffer calculation.

Separately, the Board issued a request for comment on a revision to its noninterest income model intended to better reflect differences in banks' business models and fee-income generation. Comments must be submitted within 60 days of the Federal Register notice.

"The stress test is an essential component of our regulatory capital framework," Vice Chair for Supervision Michelle W. Bowman said, adding that the changes preserve resilience by making the test transparent, granular and risk-sensitive.

The Board estimates the changes will cut year-over-year volatility in capital requirements by approximately 50 percent and are not expected to materially affect aggregate capital requirements.