Fed prepares to change stress test for banks

Fed Chairman Jerome Powell stated at the Board of Governors meeting on the subject that the financial system remains robust and resilient, and that stress tests help banks understand how they contribute to maintaining their resilience.

Powell noted that stress tests, which emerged from the reforms made after the Global Financial Crisis, have been an important element of the Fed's regulatory framework and supervisory program since 2009, and reminded that they committed to increasing the transparency of stress tests and reducing the volatility in capital buffer requirements in December last year.

Powell stated that the proposals include changes to the framework governing the design of stress test models, hypothetical scenarios, and public consultation on next year's stress test scenario.

Fed Vice Chair for Supervision Michelle Bowman also stated that the Fed aims to address the lack of transparency and accountability in its supervisory stress testing process for large banks.

Bowman stated that the proposals aim to resolve issues by providing detailed information about stress test models, the scenario design process, and future scenarios to the public. He added that this will enable banks to better understand their capital requirements, increase the reliability of supervisory models through public feedback, strengthen market discipline, and increase general confidence in the fairness and effectiveness of stress tests.

Fed Board Member Michael Barr opposed the proposed changes, arguing that making models and scenarios public would make the stress testing process weak and unreliable.

The Fed also announced its proposed stress test scenarios for 2026, stating that these scenarios include a global recession, a sharp decline in risky asset prices, an increase in the unemployment rate in the US from 4.5 percent to 10 percent, and significant declines in real estate prices.