The Federal Reserve Board finalized two rules designed to make supervisory stress testing more transparent and reduce year-over-year volatility in stress-related capital requirements. The reforms, largely unchanged from 2025 proposals, are expected to cut volatility by about 50% without materially affecting aggregate capital requirements. The Board also proposed revising its noninterest income model to better reflect differences in banks’ fee-generating business models. The first rule introduces annual public input on stress test scenarios and material model changes, updates the scenario design framework and adopts models for the 2027 test. Banks with large trading books will face two global market shock components annually, with the shock producing the largest losses for each firm used in its results. The second rule will average results from the two most recent annual supervisory stress tests when calculating stress capital buffer requirements for firms tested in both years. Averaging will begin in 2028 so that only models incorporating public input are included.
Federal Reserve Board finalizes stress test transparency and capital smoothing reforms, proposes revised fee income model
The Federal Reserve Board finalized reforms to increase stress test transparency and cut year-over-year volatility in related capital requirements by about 50%, without materially changing aggregate capital requirements. The rules introduce annual public input, two global market shocks for banks with large trading books and two-year averaging for stress capital buffers from 2028. A separate proposal would revise the noninterest income model to better capture differences in banks’ fee-generating business models.