Key points

  • Fed Vice Chair Michelle Bowman said the Board will consider final stress-test revisions in the coming weeks.
  • The package would publish granular model and scenario details while averaging two annual results for stress capital buffers.
  • The rules are not final yet, and the Fed must balance predictability against sensitivity to the latest bank risks.

The Federal Reserve is approaching a decision on a broad redesign of how it stress-tests the largest U.S. banks and translates those results into capital requirements. Vice Chair for Supervision Michelle Bowman said on September 18 that the Board expects to consider final revisions in the coming weeks, marking the latest step in a multiyear effort to make the process more transparent and less volatile.

Two rules form the core package

Bowman described two outstanding rules. The first would require detailed publication of stress-test models and the process used to design hypothetical scenarios. Disclosures would cover equations, variables, coefficients, assumptions, limitations and the reasoning behind model choices. The Fed would also expand guidance for economic variables beyond unemployment and housing prices, giving banks and the public more information about how annual scenarios are constructed.

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Capital buffers would use a two-year average

The second rule would smooth the stress capital buffer, or SCB, by averaging a bank's results from its two most recent annual tests. The SCB is one part of the capital a large bank must hold to absorb losses while continuing to lend during a severe downturn. The proposed framework would also move the annual effective date from October 1 to January 1, aligning implementation with the calendar year and giving firms more time to adjust.

The policy aims to reduce sudden swings

The Federal Register proposal published in April 2025 said year-to-year changes in bank balance sheets, economic starting points, scenario variables and supervisory models can all move test outcomes. Abrupt increases may force a firm to retain earnings, issue equity or reduce risk-weighted assets faster than planned. Averaging is intended to phase in those changes and improve capital planning without removing the test's forward-looking role.

Aggregate capital is expected to stay broadly stable

Bowman said the combined rules would cut SCB volatility by half without materially changing aggregate required capital. The original proposal kept the existing minimum SCB floor of 2.5% of risk-weighted assets. That distinction matters: the overhaul is presented as a change in how requirements are calculated and explained, not as a blanket reduction in the amount of capital held across the banking system.

More predictability comes with a trade-off

A two-year average can make annual requirements easier to anticipate, but it also brings older information into the calculation. The Fed's proposal acknowledged that averaging may delay recognition of a rapid change in a bank's business mix or risk profile. Bowman said the Board is still considering comments on balance-sheet timing and using two global market-shock scenarios, with the larger loss determining the buffer. Final text could therefore differ from the proposals.

Stress testing may expand beyond capital rules

Bowman also outlined a broader supervisory use for stress testing. Additional scenarios, portfolio-level analysis and reverse stress tests could help examiners identify firm-specific financial and nonfinancial vulnerabilities before they become acute. Those exercises would inform supervision rather than capital requirements, and their results would remain confidential. For banks, investors and borrowers, the immediate question is narrower: whether the final rules deliver greater transparency without weakening the tests' ability to react to new risks.

A Board decision is still required

Bowman's remarks set an expected timetable but do not themselves finalize either rule. The Federal Reserve Board must consider and approve the revisions, after which the published text will determine effective dates, implementation details and any changes made in response to public comments. Until that happens, existing requirements remain the operative framework.

Sources

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