The Federal Reserve Board has put forward a proposal aimed at reducing the volatility of capital requirements derived from its annual stress test results. The announcement marks the first step in a series of actions after the Board's December promise for significant changes to the stress testing framework.
Over recent years, the landscape of administrative law experienced notable changes. As a response, the Board reevaluated the current stress testing approach and decided that modifications are necessary to enhance its robustness. The Board's stress tests are designed to assess large banks' resilience by estimating potential losses, revenue, and capital in a hypothetical severe recession. Due to the hypothetical scenarios used, stress test results vary annually, impacting the determination of the stress capital buffer (SCB), a component of the required capital for banks to handle potential losses.
The proposal introduces two main adjustments: firstly, it suggests averaging the stress test results over two years to mitigate yearly volatility in capital requirements. Secondly, it proposes deferring the annual effective date of the SCB requirement from October 1 to January 1 of the next year, allowing banks more time for capital adjustment. Additionally, the proposal includes targeted amendments to streamline the Board's data collection related to stress testing. These modifications are not intended to substantially alter the overall capital requirements.
Later this year, the Board plans to suggest further changes aimed at enhancing stress test transparency. Planned measures include publicly disclosing the models used to project hypothetical bank losses and revenue under stress, and allowing public commentary on these models and scenarios before they are finalized.
Public comments on the current proposal are invited within 60 days following its Federal Register publication.
Board memo: Proposed rule to reduce the volatility of the stress capital buffer requirement (PDF) Federal Register notice: Modifications to the Capital Plan Rule and Stress Capital Buffer Requirement (PDF) Statement by Governor Michael S. Barr