Fed Plans Stress-Test Overhaul To Cut Capital Requirement Volatility In Half
By CU Today Staff —
LONDON—The Federal Reserve is preparing to finalize an overhaul of its bank stress-testing framework that Vice Chair for Supervision Michelle Bowman said will cut volatility in stress capital buffer requirements in half while making the process more transparent and predictable.
Bowman, speaking Friday at the Luncheon of the Lord Mayor of the City of London at Mansion House, said the Fed Board will consider final revisions in the coming weeks.
One of the changes would require the Fed to disclose detailed information about its stress-test models, including equations, variables, coefficients, assumptions and limitations, as well as more information about how hypothetical economic scenarios are constructed. Bowman said the changes are intended to address longstanding criticism that the tests have been too opaque and produced unpredictable year-to-year results.
A second change would calculate a bank’s stress capital buffer by averaging results from its two most recent annual stress tests rather than relying solely on the latest test. The Fed also plans to move the effective date of annual stress capital buffer requirements from Oct. 1 to Jan. 1, giving banks more time to implement resulting capital requirements. Bowman said the combined changes would reduce volatility by half without materially changing aggregate required capital levels.
Bowman also said she will recommend a third proposal revising models for the 2027 stress test, including a new approach for estimating noninterest income from businesses such as wealth management, investment banking and market making. Separately, she said the Fed expects before year-end to finalize reforms to risk-based capital requirements for large and small banks and changes to the global systemically important bank surcharge.
Beyond setting capital requirements, Bowman wants the Fed to expand stress testing as a supervisory tool for detecting institution-specific financial and nonfinancial vulnerabilities before they become serious. That could include additional scenario analyses and reverse stress tests whose results would inform supervision rather than capital requirements and would not be publicly released. Bowman pointed to Silicon Valley Bank as an example, saying such analysis could have exposed its interest-rate and uninsured-deposit vulnerabilities earlier and prompted faster supervisory action.
Originally reported by CU Today.