Fed proposes stress test changes

The Federal Reserve proposed changes that would reduce the volatility of capital requirements stemming from its annual stress test results.

Background: The Fed's stress test framework generally applies to firms with $100 billion or more in total consolidated assets. The stress test evaluates the resilience of large banks and their holding companies by assessing whether they have sufficient capital levels to absorb potential losses and continue lending under a hypothetical severe recession scenario.

More: The results help determine the calibration of the stress capital buffer, one component of the amount of capital large banks must hold to absorb losses. Changes to certain elements of the stress test each cycle can increase volatility and reduce the predictability of capital requirements, which makes capital planning more difficult and can negatively impact access to credit and banking services.

Proposal: In the first of several changes intended to improve stress testing transparency, the Fed said its proposal would:

• Average stress test results over two consecutive years to reduce the year-over-year changes in the capital requirements that result from the stress test.

• Delay the annual effective date of the stress capital buffer requirement from October 1 to January 1 of the following year, giving banks additional time to adjust to their new capital requirements.

• Make targeted changes to streamline stress test-related data collection.

Input: Comments on the proposal are due 60 days after publication in the Federal Register.