Federal Reserve Finalizes Rules to Stabilize Bank Stress Tests

The Federal Reserve Board finalized two rules on Wednesday designed to increase the transparency and stability of its bank stress tests. The first rule mandates annual public input on stress test scenarios and model changes, updates the framework for hypothetical scenarios, and implements a dual global market shock component for banks with large trading books to identify potential losses.

The second rule requires banks to average the results of the two most recent annual supervisory stress tests when calculating stress capital buffer requirements. This measure, set to begin in 2028, aims to reduce year-over-year volatility in capital requirements by approximately 50 percent without materially affecting aggregate capital levels.

Additionally, the Board requested public comment on a proposal to revise the noninterest income model to better capture diversity in how banks generate fee income. Vice Chair for Supervision Michelle Bowman stated that the changes preserve the resilience of the regulatory capital framework by ensuring it remains transparent, granular, and risk-sensitive.