The Federal Reserve requested comment on proposals to enhance the transparency and public accountability of its annual stress test. The proposals seek comment on: the stress test models; changes to the framework that guides the design of the hypothetical scenarios; and the hypothetical scenarios for the upcoming 2026 stress test.
The Federal Reserve conducts stress tests to ensure that large banks are sufficiently capitalized and able to lend to households and businesses even in a severe recession. In December 2024, the Board announced it would modify the test in important respects to improve its resilience.
“In an effort to avoid litigation, the Board committed to make significant improvements in the transparency of the stress tests. These proposals take a necessary step toward fulfilling that commitment, and would promote due process,” said vice chair for Supervision Michelle Bowman, in a statement. “Regulated firms should be subject to clearly articulated and transparent rules. Capital requirements should not be set in a way that is shielded from meaningful public scrutiny.”
The proposals request comment on several other elements, including an enhanced disclosure process for future stress test cycles, adjustments to the annual timeline to accommodate a comment period for scenarios, and enhancements to reporting forms to reduce burden and improve risk capture.
Annual stress test outcomes vary from year to year based on a number of factors including scenario design. Although historically, outcomes have varied significantly, resulting in volatility in capital requirements from year to year based on that design, in aggregate, the Fed estimates that the proposed stress test model and scenario changes would not materially change capital requirements for firms subject to the supervisory stress test, across various stress scenarios and starting test conditions.
In a joint statement, The Bank Policy Institute, the American Bankers Association, the Ohio Bankers League and the Ohio Chamber of Commerce (the associations) wrote:
“In December 2024, we initiated litigation because the Federal Reserve was operating its stress test in violation of the Administrative Procedure Act and due process. As a result of today’s proposal, not just banks but all interested parties will have the opportunity to review models of great consequence for the U.S. economy and provide informed comment on how those models could be improved to better reflect risk. The flaws in supervisory models and lack of transparency have caused unnecessary volatility in capital requirements and imposed unwarranted costs on the economy by reducing market liquidity, limiting the availability and increasing the cost of credit, and ultimately slowing job creation and economic growth. Today is not just a good day for the rule of law but also a good day for economic growth.
“Today’s proposal also sets the Federal Reserve on a path toward permanent improvements to the models and the Federal Reserve’s process for conducting annual stress tests. Going forward, we expect the Federal Reserve to consider the public’s comments and finalize rules that will ensure that in 2026 and future years, the stress tests are conducted in a manner more reflective of stress tests’ importance to the economy.”