The Federal Reserve today finalized two rules to give the public more opportunities to comment on the models used in stress tests for large banks and to revise how it calculates certain capital buffer requirements.
The first rule requires that the Fed seek public input annually on stress test scenarios and any material model changes. It also makes several changes to the stress test calendar, including establishing a Jan. 10 deadline for disclosing proposed stress test scenarios.
The second rule changes how the Fed calculates stress capital buffer requirements by requiring it to average the results from the two most recent annual supervisory stress tests for firms subject to stress tests in both years. The change will take effect in 2028.
Seeking transparency
The Fed first proposed changes to the stress tests last year. The proposals came roughly a year after the American Bankers Association joined the Ohio Bankers League, Bank Policy Institute and other industry groups in filing a lawsuit challenging the stress testing framework for being too opaque.
In a statement, Fed Vice Chair for Supervision Michelle Bowman said the changes preserve stress test 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,” she said.
Still, the changes have met resistance. In April, the top Democrats on the House and Senate banking committees accused the Fed of watering down the tests to fulfill “Wall Street’s wish list.” Also, Fed Governor Michael Barr issued a statement in conjunction with today’s announcements saying that while he supports some of the changes, he believes the increased transparency requirements would make the stress tests less responsive to emerging risks.
“Over time, the rule will reduce the dynamism, rigor, conservatism, and credibility of the stress test and thus undermine financial stability,” Barr said.
ABA response
In a joint statement with the Bank Policy Institute, ABA said that transparency and public input “have produced a better stress testing framework that should improve accuracy and allow more thoughtful capital planning at covered banks, with economic benefits to the country.”
“We appreciate that the Fed is taking the time and using an appropriate process to fix flaws in those models identified in the recent comment process,” the two associations said.
