WASHINGTON—In view of the “evolving legal landscape,” the Federal Reserve said it 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 Fed’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. 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 Fed stated.
The Fed said it 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 Fed explained.
The framework of administrative law has changed significantly in recent years, the Fed said.
“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 Fed noted. “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 said it plans to take immediate steps to reduce the volatility of the results and begin to improve model transparency. The public comment process will begin in the early part of 2025, the Fed noted.