The U.S. Federal Reserve unveiled a major proposal Thursday to retool its annual stress tests for large banks, aiming to reduce volatility in capital requirements and enhance transparency.
Central to the proposal is a plan to average stress test results over a two-year span to determine banks’ capital buffers, rather than relying solely on data from a single year.
In a bid to give banks more flexibility, the Fed suggested extending the timeframe for firms to align with new capital mandates. Under the plan, banks would have until January to finalize capital strategies after receiving their stress test results in June—three months longer than the current October deadline.
Alongside these changes, the Fed will streamline data collection for the exams, though it insisted that the adjustments are not intended to significantly raise or lower the level of capital banks must hold.
This sweeping review follows a series of court rulings curbing regulatory authority and comes amid longstanding industry calls for a less opaque and more consistent process, with banks criticizing the subjectivity of so-called stress capital buffers.
Further reforms are expected later this year, with the Fed planning to propose public disclosure of the models and hypothetical scenarios used in the tests, inviting industry and public commentary.
Meanwhile, not all Fed officials support the changes. Governor Michael Barr, who until recently was the Fed’s top regulatory officer, cast a dissenting vote and raised concerns the overhaul could make the tests less effective.
He cautioned that opening the models for public scrutiny might enable banks to lobby for weaker standards or exploit gaps, undermining the resilience of the financial system. Barr also worried that requiring feedback could impede the Fed’s ability to adapt the exams to emerging risks.
Moreover, Fed Governor Adriana Kugler, while backing the proposal, flagged potential issues with relying equally on older and more recent financial statements in setting capital requirements. She suggested more weight should be given to up-to-date data and called for feedback on how to better reflect shifting economic conditions.
