September 30, 2026

Federal Reserve Board finalizes changes to enhance the transparency and public accountability of its stress test and reduce volatility in its stress test-related capital requirements

WASHINGTON—In a significant move aimed at reshaping how the nation’s largest financial institutions prepare for economic downturns, the Federal Reserve Board on Wednesday finalized comprehensive changes designed to enhance both the transparency and public accountability of its annual bank stress tests. The sweeping regulatory updates are also specifically engineered to significantly reduce year-over-year volatility in stress test-related capital requirements, bringing greater stability and predictability to the banking sector.

The two final rules released by the central bank are largely similar to the preliminary proposals introduced by the Board back in 2025. Alongside these finalized regulatory measures, the Board also took the opportunity to issue a new request for public comment on a targeted proposal. This additional proposal is intended to better capture the diverse nuances of modern banking business models, particularly regarding how institutions generate fee income during periods of severe economic stress.

The Federal Reserve routinely conducts rigorous annual stress tests to ensure that the nation’s largest and most complex banking organizations remain sufficiently capitalized. The ultimate goal of these evaluations is to guarantee that major financial institutions retain the financial strength necessary to continue lending to American households and businesses, even when faced with the pressures of a severe economic recession. The foundational architecture of these tests underwent a major reassessment when the Board announced in December 2024 that it would modify the assessment mechanisms to continuously improve structural resilience across the financial system.

"The stress test is an essential component of our regulatory capital framework," said Vice Chair for Supervision Michelle W. Bowman, emphasizing the critical role these evaluations play in maintaining macroeconomic stability. "Today’s changes preserve its resilience by ensuring that it is transparent, granular, and risk-sensitive. The public will now have greater assurance that the risks banks take will be reflected appropriately in their stress test losses and their capital requirements."

Under the first final rule approved by the Board, regulators are now required to invite public input on an annual basis regarding the design of the stress test scenarios, as well as any material model changes being contemplated by the central bank. This structural shift opens the door for external stakeholders, academics, market participants, and consumer advocates to provide valuable perspectives on the hypothetical economic scenarios that test the limits of bank balance sheets.

Furthermore, this first final rule updates the overarching framework that guides the design of the hypothetical scenarios themselves and officially adopts the specific models that will be utilized for the upcoming 2027 stress test cycle. In a move to streamline the regulatory calendar, the final rule also makes several administrative adjustments to the stress test timeline, ensuring a more orderly and predictable flow of information between regulators and the banking industry.

A particularly noteworthy component of the first final rule involves updates to the global market shock framework. This specialized mechanism applies a complex set of severe stress shocks to specific market components for institutions that maintain large trading books. Under the updated regulations, these trading-heavy banks will now be tested against two distinct global market shock components each year. To ensure a conservative and accurate assessment of risk, the Board will utilize the specific shock that produces the largest potential losses for each individual firm when calculating their final stress test results.

The second final rule addresses the mechanics of how stress capital buffer requirements are calculated and implemented. Moving forward, the rule requires the Board to average the results from the two most recent annual supervisory stress tests for firms that are subject to the stress test requirement in both consecutive years. To ensure a smooth transition and guarantee that only models incorporating robust public input are utilized in the mathematical calculations, the Board will officially begin averaging these stress capital buffer requirements starting in the year 2028.

In tandem with these final rules, the Board’s newly issued proposal invites public feedback on a targeted revision concerning its noninterest income model. This proposed change is designed to markedly improve the stress test’s capability to capture true business model diversity across various firms within the banking sector. If ultimately adopted following the public comment period, these adjustments will replace the current noninterest income model, which is currently relied upon to project each individual bank’s fee income under severe economic stress conditions. Interested parties and stakeholders have been given a window of 60 days following the official publication of the proposal in the Federal Register to submit their formal comments and observations to the Board.

Taken together, industry analysts and central bank officials anticipate that this cohesive package of regulatory changes will successfully reduce year-over-year volatility in capital requirements by approximately 50 percent. Despite this dramatic reduction in regulatory unpredictability, the changes are not expected to materially affect aggregate capital requirements across the banking system as a whole.

For media inquiries and further information regarding these finalized rules and regulatory proposals, individuals are encouraged to contact the Federal Reserve Board via email at [email protected] or by telephone at 202-452-2955.