Fed finalizes stress-test transparency rules, will average results to cut capital volatility
The Federal Reserve has finalized two rules reshaping how its supervisory stress test feeds into bank capital requirements, adding annual public comment on scenarios and models and introducing two-year averaging of the stress capital buffer. A third proposal on noninterest-income modeling is out for comment. The Board estimates the package cuts year-over-year volatility in capital requirements by roughly 50 percent.
- The first final rule requires the Board to invite public input annually on stress test scenarios and any material model changes, and adopts the models to be used for the 2027 stress test.
- Banks with large trading books will be tested against two global market shock components each year, with the Board using the shock that produces the largest losses for each firm.
- The second final rule averages the two most recent annual supervisory stress test results when calculating stress capital buffer requirements, with averaging beginning in 2028.
- A separate proposal would revise the noninterest income model to better capture business model diversity; comments are due 60 days after Federal Register publication.
- The Board estimates the changes will reduce year-over-year volatility in capital requirements by approximately 50 percent and not materially affect aggregate capital requirements.