Federal Reserve Board Finalizes Changes to Stress Test Framework to Enhance Transparency and Reduce Volatility

The Federal Reserve Board has finalized a set of changes aimed at enhancing the transparency and public accountability of its stress testing framework while also reducing the volatility of stress test-related capital requirements. These changes, which include the introduction of a public input process for stress test models and scenarios, are designed to improve the clarity and predictability of the stress capital buffer requirements for financial institutions.

Enhanced Transparency and Public Accountability

The Federal Reserve Board has adopted a final rule to increase the transparency and public accountability of its stress testing framework. This rule, effective for the 2027 stress test, requires the Board to invite public input annually on stress test scenarios and material model changes. Amendments have also been made to the Board’s Stress Testing Policy Statement and the Scenario Design Framework to enhance the content of results disclosed to firms and guide the scenario design process. Additionally, supervisory models for the 2027 stress test will be adopted following public input.

Volatility Reduction in Stress Capital Buffer Requirements

The Board has finalized a rule to reduce the volatility of stress capital buffer requirements by averaging the results from the two most recent annual supervisory stress tests. This change will be effective starting with the stress capital buffer requirement on January 1, 2029. The effective date for the stress capital buffer requirement will be moved to January 1 of the year following the stress test, providing firms with additional time to comply with new requirements.

2027 Model Changes and Reporting Proposal

The Board is also seeking public feedback on additional revisions to the models for the 2027 stress test. Proposed changes include a revised noninterest income model to better capture business model diversity across firms. Adjustments to the FR Y-14A/Q/M reporting forms are also proposed to support future model development and improve existing instructions.

Combined Impact Analysis

The combined impact of the enhanced transparency and public accountability final rule and the volatility final rule is not expected to materially change aggregate capital requirements. Staff analysis indicates that these changes would have reduced aggregate stress capital buffer requirements by approximately 1% of required common equity tier 1 capital. Additionally, the volatility of annual changes in stress capital buffer requirements is expected to be reduced by approximately 50%.

Background and Rationale

Stress testing is a key component of the Federal Reserve's regulatory framework for large firms, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The stress tests assess whether large financial institutions have sufficient capital to absorb potential losses under hypothetical adverse conditions. Since 2020, the results of these tests have informed each firm’s stress capital buffer requirement, which adapts to changing economic conditions and firm risk profiles. The recent changes aim to improve firms' understanding of capital requirements, facilitating better long-term capital planning and supporting economic growth and financial stability.