The Federal Reserve Board has opened up for public comment a proposal aimed at lessening the volatility of capital requirements that originate from the Board’s annual stress test results. This proposal is the initial step following an announcement made by the Board in December, which promised comprehensive changes to the stress test framework.
Significant changes in administrative law have prompted the Board to reassess the current stress test. This reassessment concluded that certain modifications are necessary to enhance the test’s resilience. The stress test is designed to evaluate the strength of large banks by simulating potential losses, revenues, and capital levels during a hypothetical severe recession. As the scenario changes annually, the resulting volatility in stress test outcomes affects how the stress capital buffer (SCB) is calibrated. The SCB is a crucial element determining the capital large banks must hold to cover potential losses.
The new proposal introduces key updates. One of these updates involves calculating stress test results based on an average over two consecutive years to minimize fluctuations in capital requirements. Additionally, the proposal suggests altering the effective date of the stress capital buffer requirement from October 1 to January 1 of the following year. This delay aims to give banks more time to adjust to new capital mandates. Another target of the proposal is the refinement of data collection processes related to the stress test. These changes are not intended to substantially alter overall capital requirements.
The Board plans to introduce further improvements later this year to enhance transparency around the stress test. These improvements will include the disclosure of models used to determine banks’ hypothetical losses and revenue under stress, and a process for public feedback on these scenarios before finalization.
The deadline for submitting comments on the current proposal is set for 60 days following its publication in the Federal Register.
Governor Michael S. Barr provided a statement regarding these proposed alterations.
Below are links to related documents for further details:
– 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)
