December 23, 2024
Due to evolving legal landscape & changes in the framework of administrative law, Federal Reserve Board will soon seek public comment on significant changes to improve transparency of bank stress tests & reduce volatility of resulting capital requirements
For release at 4:00 p.m. EST
In view of the evolving legal landscape, the Federal Reserve Board will soon seek public comment on significant changes to improve the transparency of its bank stress tests and to reduce the volatility of resulting capital buffer requirements.
The Board's stress test evaluates the resilience of large banks by estimating their losses, revenue, and capital levels under a hypothetical recession scenario that changes each year. Capital acts as a cushion to absorb losses and allows banks to continue lending to households and businesses even during a recession. Since its inception over 15 years ago, large banks in the stress test have more than doubled their capital levels, an increase of more than $1 trillion.
The Board intends to propose changes that include, but are not limited to: disclosing and seeking public comment on all of the models that determine the hypothetical losses and revenue of banks under stress; averaging results over two years to reduce the year-over-year changes in the capital requirements that result from the stress test; and ensuring that the public can comment on the hypothetical scenarios used annually for the test, before the scenarios are finalized. These proposed changes are not designed to materially affect overall capital requirements.
The framework of administrative law has changed significantly in recent years. The Board analyzed the current stress test in view of the evolving legal landscape and determined to modify the test in important respects to improve its resiliency.
The Board will continue its exploratory analysis, which assesses additional risks to the banking system in ways that are separate from the stress test. The analysis would be used to inform bank supervision and financial stability assessments. It will continue to be disclosed in aggregate and not affect bank capital requirements.
For the 2025 stress test, the Board plans to take immediate steps to reduce the volatility of the results and begin to improve model transparency. The Board intends to begin the public comment process on its comprehensive changes to the stress test during the early part of 2025.
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