Fed to Finalize Stress-Test Overhaul, Promises Greater Transparency

The Federal Reserve is set to finalize an overhaul of its stress-testing regime for large banks, a move its top regulatory official says will make the process more transparent and its outcomes more predictable for lenders.

Michelle Bowman, the Fed's Vice Chair for Supervision, said the central bank will vote on the final version of the revised exam in the coming weeks. Speaking at an event in London, she said the step would close the book on a framework she described as opaque and unnecessarily unpredictable.

Large banks have long argued that the stress tests, introduced after the 2008 financial crisis and used to set additional capital requirements, are subjective and burdensome. The industry sued the Fed in 2024 over the use of the tests, and the central bank proposed a series of changes in October under Bowman's leadership.

Under the new approach, the Fed will disclose far more about the models it uses to assess banks for weaknesses, including equations, variables and other technical details that were previously kept confidential. It will also provide more information about the hypothetical economic scenarios crafted each year for the exercise, giving the public a clearer view of how testing works.

The Fed also plans to adopt a rule that would average the results of a bank's two most recent stress tests when setting its "stress capital buffer." According to Bowman, this change would reduce year-to-year volatility in the capital banks must hold.

In addition, the public will be able to comment on the testing models, and the Fed intends to use the stress-testing process to privately alert supervisors to potential weaknesses at banks. Bowman noted that banks already run multiple internal stress tests and said examiners and lenders should maintain an open dialogue about relevant findings, adding that there is tremendous value in comparing notes.

The stress-test revamp is a central part of Bowman's broader effort to reshape, and in many cases ease, capital requirements for banks. She said she expects the Fed to complete work by the end of the year on two major capital rules: the Basel rules on risk-based capital and a revision of the additional capital charge applied to globally systemic banks, which the Fed anticipates will lower the reserves large banks must hold.