By Pete Schroeder
WASHINGTON, Sept 18 (Reuters) – The Federal Reserve’s top regulatory official said on Friday the US central bank will soon finalize an overhaul of its “stress test” of big banks to make the process more transparent and the results more predictable for lenders, handing the industry long-sought reforms to the exam process.
Fed Vice Chair for Supervision Michelle Bowman said at an event in London that the central bank will vote on a final version of the revamped exam in the “coming weeks,” which she said would “finally close the book on an opaque and unnecessarily unpredictable framework.”
Banks have complained for years that the Fed’s stress tests, put in place following the 2008 financial crisis and used to set additional capital requirements for the nation’s largest lenders, are subjective and onerous. The industry sued the Fed in 2024 to challenge the use of the tests, and the central bank under Bowman put forward a series of proposed changes in October.
On Friday, Bowman said the new version of the test will shed far more light on the models the Fed uses to probe banks for weaknesses, including various equations, variables, and other technical details the central bank long kept secret from the industry. The new process will also provide more details on the hypothetical economic scenarios created each year for the test, changes Bowman said will allow the public a greater understanding of the testing process.
The Fed also plans to adopt a new rule that would average the results of a bank’s two most recent stress tests when assigning capital requirements known as the “stress capital buffer.” Bowman said this approach will reduce volatility in the capital that banks must set aside each year.
Going forward, Bowman said the public will be able to comment on the testing models, and the Fed intends to use its stress testing process to help privately inform supervisors of potential bank weaknesses. She added that banks are already conducting multiple internal stress tests on their own, and examiners and banks should have “open dialogue” on any relevant findings.
“I believe there is tremendous value in comparing notes,” she said.
The push to complete the stress testing overhaul will be a major step in Bowman’s efforts to transform, and in many cases ease, capital requirements imposed on banks. She added in her remarks that she expects the Fed will wrap up work on a pair of major capital rules by the end of the year: the so-called Basel rules on risk-based capital and a revamp of the additional capital charge applied to globally systemic banks, which the Fed anticipates will lower the capital large banks are required to hold in reserve.
(Reporting by Pete Schroeder; Editing by Paul Simao)
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