Fed Overhauls Stress Tests, Aims To Cut Capital Volatility By 50%
By CU Today Staff —
WASHINGTON—The Federal Reserve Board Wednesday finalized changes to its annual stress tests for large banks that are intended to increase transparency and reduce year-to-year swings in stress-test-related capital requirements by approximately 50%.
The Fed said the changes are not expected to materially affect aggregate capital requirements.
Under one final rule, the Fed will seek public input annually on stress-test scenarios and material changes to the models it uses to estimate bank losses. The rule also changes the stress-test calendar and requires banks with large trading books to face two global market shock scenarios, with the scenario producing the largest losses used in calculating each firm's results.
"The stress test is an essential component of our regulatory capital framework," said Michelle W. Bowman, vice chair for supervision. "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."
A second final rule will calculate stress capital buffer requirements by averaging results from the two most recent annual supervisory stress tests, beginning in 2028. Separately, the Fed is seeking comment on proposed changes to its noninterest-income model intended to better account for differences in banks' fee-generating business models. Comments are due 60 days after publication in the Federal Register.
Originally reported by CU Today.