OFR: Capital Buffers and the Future of Bank Stress Tests

The Basel III banking accord introduced the concept of capital buffers — extra capital cushions on top of regulatory capital minimums — to absorb unexpected shocks. These buffer requirements are now phasing in for U.S. banks. Federal Reserve of cials are considering including these buffers in bank stress tests. With such a change, some banks will need to hold more capital to pass stress tests. However, another potential change would permit banks to use static balance sheets (that is, balance sheets unchanged from the prior period) in stress tests, which could make the tests less effective.

The Office of Financial Research Brief is available here.

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