The US Federal Reserve has finalised changes to its annual stress tests for large banks, aiming to make the process more transparent while reducing year-on-year volatility in capital requirements.

The changes largely mirror proposals published by the central bank in 2025 following concerns about the transparency and consistency of the tests, which assess whether large banks could continue lending during a severe recession. The Fed said the reforms are expected to reduce volatility in stress-related capital requirements by approximately 50 per cent without materially changing aggregate capital requirements.

Fed vice chair for supervision Michelle W. Bowman said the changes would preserve the role of stress testing within the regulatory capital framework. “The stress test is an essential component of our regulatory capital framework,” Bowman said, adding that the revised process would give the public greater assurance that banks’ risks are appropriately reflected in their losses and capital requirements.

Under the first final rule, the Fed will seek public input each year on stress test scenarios and material changes to the models used to calculate results. The rule also updates the framework governing hypothetical economic scenarios and adopts the models that will be used for the 2027 stress test.

The Fed will make changes to the stress test calendar and global market shock component, which applies shocks to specific market components at banks with large trading books. Those banks will face two global market shock components each year, with the shock producing the largest losses for each firm used in its stress test results.

The second rule changes how stress capital buffer requirements are calculated for banks subject to stress testing in consecutive years. From 2028, the Fed will average results from the two most recent annual supervisory stress tests, with the change intended to reduce fluctuations in individual firms’ capital requirements.

Reuters reported that the reforms follow years of complaints from the banking industry that stress tests were opaque and subjective. The news agency said the revamped process will allow public feedback on major model changes and hypothetical downturns used by the Fed.

The Fed has separately requested comments on a proposed revision to its noninterest income model, designed to better reflect differences between banks’ business models and their ability to generate fee income under stress. The consultation will remain open for 60 days after the proposal is published in the Federal Register.

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