Federal Reserve Board Finalizes Changes to Enhance Transparency and Public Accountability of Stress Tests and Reduce Capital Requirement Volatility
For release at 9:00 a.m. EDT
The Federal Reserve Board on Wednesday officially finalized a sweeping set of changes designed to significantly enhance the transparency and public accountability of its bank stress testing framework. Alongside these structural reforms, the central bank took definitive action to reduce year-over-year volatility in its stress test-related capital requirements, aiming to provide a more stable and predictable regulatory environment for the nation’s largest financial institutions.
The two final rules released by the Board are largely similar to the preliminary proposals first introduced to the public in 2025. In addition to finalizing these major structural adjustments, the Board also issued a fresh request for public comment on a new proposal intended to better capture the unique differences in individual banks’ business models, particularly regarding how institutions generate fee income.
The Federal Reserve conducts rigorous annual stress tests to ensure that large, systemically important banking organizations are sufficiently capitalized and maintain the financial resilience required to continue lending to households and businesses, even during times of severe economic distress and deep recession. The latest round of modifications builds directly upon prior announcements made by the Board in December 2024, when leadership first outlined its intention to modify the stress testing apparatus to improve overall institutional resilience.
"The stress test is an essential component of our regulatory capital framework," said Vice Chair for Supervision Michelle W. Bowman, emphasizing the critical role these evaluations play in maintaining a safe and sound financial system. "Today’s changes preserve its resilience by ensuring that it is transparent, granular, and risk-sensitive. The public will now have greater assurance that the risks banks take will be reflected appropriately in their stress test losses and their capital requirements."
The first of the two final rules introduces significant procedural updates, requiring the Board to formally invite public input on an annual basis regarding the design of the stress test scenarios and any material modifications made to underlying economic models. This institutionalized feedback mechanism is designed to open up the historically opaque modeling process to external scrutiny and expert review. Furthermore, the rule updates the broader framework that guides the design of hypothetical economic and financial scenarios, while formally adopting the specific quantitative models that will be utilized for the upcoming 2027 stress test cycle.
In addition to incorporating public input, the first final rule institutes several administrative adjustments to the stress test calendar, streamlining the timeline for data collection, scenario release, and result publication. A major component of this rule also updates the global market shock framework—a specialized set of severe, instantaneous shocks to specific financial market risk factors that are applied exclusively to institutions with large and complex trading books. Under the updated provisions, these major trading institutions will now be tested against two distinct global market shock components each year. To determine final outcomes, the Board will utilize the specific shock scenario that produces the largest potential losses for each individual firm when calculating their official stress test results.
The second final rule addresses the mechanics of how supervisory outcomes translate into binding regulatory mandates. Specifically, the rule requires the Board, when calculating stress capital buffer requirements, to average the results derived from the two most recent annual supervisory stress tests for banking organizations that are subject to the stress test requirement in both years. To ensure a smooth transition and maintain analytical integrity, the Board will officially begin averaging these stress capital buffer requirements starting in 2028. This phased implementation guarantees that only models incorporating thorough public input are utilized in the final capital calculations.
Complementing these final rules, the new supervisory proposal issued by the Board requests public comment on a targeted revision to the central bank’s noninterest income model. If ultimately adopted, these proposed adjustments would significantly improve the stress test’s ability to capture structural business model diversity across different firms. The changes would replace the current noninterest income model, which is responsible for projecting each individual bank’s fee income performance under severe financial stress. Interested stakeholders and members of the public have sixty days from the date of publication in the Federal Register to submit formal comments on the proposal.
Industry analysts and regulatory experts note that the collective impact of these comprehensive changes will be substantial. Taken together, the reforms are projected to reduce year-over-year volatility in capital requirements by approximately 50 percent, removing sudden, unpredictable swings that have previously complicated capital planning for major banking institutions. Despite this significant smoothing effect on capital volatility, the modifications are not expected to materially alter aggregate capital requirements across the banking sector as a whole.
For further media inquiries regarding the final rules and related proposals, please contact the Federal Reserve Board’s media relations office via email at [email protected] or by telephone at 202-452-2955.
