Fed Finalizes Stress-Test Changes to Boost Transparency

The Federal Reserve has finalized two rules aimed at increasing transparency and reducing volatility in bank stress testing. One rule allows for public comment on annual stress test scenarios and material changes to related models, while the other requires the Fed to calculate a bank's stress capital buffer using the average of the last two annual tests.

These changes are expected to cut in half the yearly volatility banks see in stress test-mandated capital requirements. The rules also allow for the use of two global market shock components each year, with companies' stress-test results measured using the shock that creates the larger loss.

The Fed has requested public comment on a revision to the model used to measure noninterest income, which will be published in the Federal Register and due 60 days after publication.

Michelle Bowman, the Fed's vice chair for supervision, said the changes preserve the resilience of the stress test by ensuring it is transparent, granular, and risk-sensitive.