US Federal Reserve updates stress test procedures for banks
The Federal Reserve has taken steps to increase the transparency of tests measuring the resilience of major financial institutions and to prevent fluctuations in capital requirements.
The US Federal Reserve (Fed) has finalized changes designed to increase the transparency of stress tests applied to banks and to reduce volatility in capital requirements.
Purpose of Stress Test Changes
The US Federal Reserve (Fed) has finalized changes designed to increase the transparency and public accountability of the stress test it applies to banks, and to reduce volatility in stress test-linked capital requirements.
Public Comment and Schedule Adjustment
Under the first rule, the Fed Board of Governors is now required to annually solicit public comments on stress test scenarios and significant model changes.
Within the scope of the regulation, the framework guiding the preparation of hypothetical scenarios was updated, models to be used in the 2027 stress test were determined, and various changes were made to the testing schedule.
Global Market Shock Applications
The global market shock component, applied to banks with large trading portfolios and consisting of shocks targeting specific market components, has also been updated.
These banks will now be tested against two global market shock components each year, and the shock that yields the highest loss for each bank will be used in the calculation.
Stress Capital Buffer Calculations
With the second final rule, changes were also made to the calculation of stress capital buffer requirements, making it mandatory to take the average of the last two years' results for institutions tested in both of those years.
Expectation of Volatility Reduction
The Fed announced that the averaging method for stress capital buffer requirements will begin to be implemented in 2028, and expects the changes to reduce year-over-year volatility in capital requirements by approximately 50 percent.