Federal Reserve to Overhaul Large Bank Stress Tests

Federal Reserve Vice Chair for Supervision Michelle Bowman announced that the U.S. central bank will soon finalize a comprehensive overhaul of its stress tests for large banks. Speaking at an event in London, Bowman detailed a revamped process designed to increase transparency by disclosing the specific models, equations, and variables used to identify bank weaknesses, while providing more granular detail on hypothetical economic scenarios.

To reduce annual capital volatility, the Federal Reserve plans to implement a new rule that averages the results of a bank's two most recent tests to determine the stress capital buffer. These reforms address years of industry criticism that the framework established after the 2008 financial crisis was too subjective and opaque.

Bowman expects the Federal Reserve to vote on the final version of these changes in the coming weeks. Additionally, the central bank aims to complete further work on Basel risk-based capital rules and charges for globally systemic banks by the end of the year.