Fed to Finalise Stress Test Overhaul in Coming Weeks, Bowman Says
Fed Vice Chair for Supervision Michelle Bowman said a final version of the revamped bank stress test will be considered in the coming weeks, with more disclosure and averaged capital buffers.
The Federal Reserve is set to finalise a long-awaited overhaul of its stress test for large banks, with the central bank's top regulatory official saying a final version of the revamped exam will be taken up in the coming weeks.
In prepared remarks delivered in London, Fed Vice Chair for Supervision Michelle Bowman said the changes would make the testing process more transparent and its outcomes more predictable for lenders, closing what she described as an opaque and unnecessarily unpredictable framework.
The stress tests were introduced after the 2008 financial crisis and are used to set additional capital requirements for the largest US lenders. Banks have argued for years that the exams are subjective and burdensome, and the industry sued the Fed in 2024 over their use. Under Bowman, the central bank proposed a series of changes in October.
According to Bowman, the new version will disclose far more about the models the Fed uses to probe banks for weaknesses, including equations, variables and other technical details that had long been withheld from the industry. It will also provide more information about the hypothetical economic scenarios crafted each year for the test, giving the public a clearer view of how the process works.
The Fed additionally plans to adopt a rule that would average the results of a bank's two most recent stress tests when setting the capital requirement known as the stress capital buffer. Bowman said this approach would reduce year-to-year volatility in the capital banks must set aside.
Looking ahead, Bowman said the public will be able to comment on the testing models, and the Fed intends to use the stress testing process to privately inform supervisors about potential weaknesses at banks. She noted that banks already run multiple internal stress tests of their own, adding that examiners and lenders should maintain an open dialogue on any relevant findings.
"I believe there is tremendous value in comparing notes," she said.