The central bank approved a sweeping refresh of its annual bank stress test. "The stress test is an essential component of our regulatory capital framework," Fed Vice Chair for Supervision Michelle Bowman said Wednesday. "Today's changes preserve its resilience by ensuring that it is transparent, granular and risk-sensitive."
Officials said the two final rules closely track the proposals targeted for 2025 and follow a years-long campaign by big banks to reshape the post-2008 exam. The package also formalizes that the Fed will solicit feedback on stress scenarios and on any significant changes to its models.
The board backed the move 6 to 1. Fed Governor Michael Barr dissented, warning the plan will "significantly weaken the stress test and consequently, bank resilience."
The rule set refreshes the design of the hypothetical downturn used in the exam, updates the global market shock, and makes several timing and calendar adjustments. For the stress capital buffer, the Fed will calculate it by taking an average of results from the two latest supervisory tests for firms that participate in both years, starting in 2028. The start date is meant to ensure only models that have gone through public comment feed into the math.
The Fed also opened a separate request for input on a plan to "better capture differences in banks' business models to generate fee income."
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In December 2024 the Fed signaled it would revamp the exam. Later that month, coalitions that count representatives of JPMorgan Chase & Co. and Goldman Sachs Group Inc. among their members took the agency to court, seeking more transparency and a larger role in shaping the rules.
Banking trade groups welcomed the outcome. "Transparency and public input have produced a better stress testing framework that should improve accuracy and allow more thoughtful capital planning at covered banks, with economic benefits to the country," the Bank Policy Institute and the American Bankers Association said in a joint statement.
Skeptics remain. Christopher Appel, a former Fed staffer who is now banking policy director at Better Markets, argued, "The Fed should stop relying on this increasingly hollow exercise to set capital requirements. Instead, it should use stress testing as a flexible supervisory tool to uncover vulnerabilities, challenge banks' assumptions, and demand corrective action."
Earlier this year, the largest lenders again cleared the exam, then promptly ramped up dividends and stock buybacks, topping a high-water mark set in 2019. With these new rules, the Fed says year-over-year volatility in required capital should fall by roughly half, and it does not expect a meaningful shift in the total capital banks must hold. If that plays out, banks may get a steadier backdrop for planning payouts, even if the overall amount of capital in the system stays about the same.
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