In a speech, Federal Reserve Board Governor Michael S. Barr argued that the Board’s proposed stress testing changes developed in response to litigation by large bank trade associations risk making the framework less rigorous and less credible. He opposed subjecting stress test models and scenarios to a notice-and-comment process and proposed an alternative approach that would separate stress testing from binding regulatory capital requirements while maintaining overall capital through other regulatory measures. Barr traced how U.S. stress testing evolved from the 2009 Supervisory Capital Assessment Program and subsequent Comprehensive Capital Analysis and Review and Dodd-Frank Act Stress Test, before highlighting how the 2020 introduction of the stress capital buffer (SCB) linked stress test outcomes to capital requirements and removed the qualitative objection process. He contended that publishing models and scenarios for public comment could ossify and slow necessary model updates, create an uneven “one-way” pressure on capital requirements, and increase the risk of banks gaming the test, citing prior use of “macro hedges” that reduced projected stress losses without providing credible protection in a real downturn. His alternative would treat stress tests primarily as a supervisory tool, preserve flexibility to run multiple scenarios, continue publishing firm-specific results, and replace firm-specific SCBs with regulatory capital requirements designed to maintain appropriate capital levels, including a 2.5 percent buffer floor for most non-global systemically important banks and higher requirements for trading-intensive global systemically important banks, potentially linked to trading book risks. In exceptional cases, he suggested using the Board’s capital directive authority to impose firm-specific requirements to address idiosyncratic risk. He indicated that decoupling stress test results from the preliminary SCB would remove the legal rationale for the proposed notice-and-comment publication of models and scenarios, allowing the Board to abandon that proposal, while leaving scope to revise replacement regulatory capital measures through future notice-and-comment processes informed by stress test data.
Federal Reserve Board 2025-09-25
Federal Reserve Board Governor Barr warns proposed stress test transparency reforms could weaken rigor and urges decoupling tests from capital requirements
Federal Reserve Board Governor Michael S. Barr criticized proposed stress testing changes, arguing they could weaken the framework's rigor. He suggested separating stress tests from binding capital requirements, maintaining capital levels through other measures, and opposed the notice-and-comment process for stress test models. Barr proposed treating stress tests as supervisory tools, preserving scenario flexibility, and replacing firm-specific stress capital buffers with regulatory capital requirements, including a 2.5% buffer floor for most non-global systemically important banks.