Federal Reserve Overhauls Stress Tests to Stabilize Bank Capital Requirements

The Federal Reserve has finalized changes to its stress-test framework aimed at reducing volatility in US bank capital requirements. Effective from 30 September, banks with large trading books will now face two global market shocks annually, with the larger loss determining capital requirements. Starting in 2028, the Fed will average results from the two most recent annual stress tests to calculate stress capital buffers, which is expected to cut year-on-year volatility in capital requirements by about 50% without significantly altering aggregate requirements.

Meanwhile, New Zealand’s revised banking prudential requirements took effect on 1 October, introducing new standardised credit-risk weights and ending the issuance of new additional Tier 1 (AT1) capital instruments. The Reserve Bank of New Zealand also announced plans to increase the prudential capital buffer for systemic banks from 5.5% to 6% by October.

The Basel Committee on Banking Supervision approved changes to the global systemically important banks (G-SIBs) framework to reduce year-end window-dressing. The adjustments aim to make systemic-risk scores more representative of risks carried throughout the year, though the capital impact remains unclear pending further details.

The Prudential Regulation Authority (PRA) reported that aggregate expected credit loss (ECL) coverage for major UK banks has fallen to its lowest level since before the Covid-19 pandemic, attributing the decline to stronger asset-quality indicators. The PRA also highlighted uneven implementation of model redevelopment and differences in ECL data governance among banks.