Federal Reserve Finalizes Stress Test and Capital Buffer Rules

The Federal Reserve Board on 30. syyskuuta 2026, finalized two rules that change how it runs its annual supervisory stress test and how it converts test results into stress capital buffer requirements for large banking organizations, and it separately requested comment on a proposal to revise the model that projects each bank’s fee income under stress. In the Board’s announcement, released at 9:00 a.m. EDT, the Board said the two final rules are largely similar to the proposed rules from 2025 and that, together, the changes are likely to reduce year-over-year volatility in capital requirements by approximately 50 percent while not materially affecting aggregate capital requirements.

The Board conducts stress tests to ensure that large banks are sufficiently capitalized and able to lend to households and businesses even in a severe recession, and it announced in joulukuu 2024 that it would modify the test to improve its resilience. The Dodd-Frank Act requires the Board to conduct an annual supervisory stress test of large firms, covering bank holding companies, savings and loan holding companies, and U.S. intermediate holding companies of foreign banking organizations, according to a staff memo to the Board dated 31. elokuuta 2026. Since 2020, stress test results have informed each firm’s stress capital buffer requirement, which is calculated as the decline in a firm’s common equity tier 1 capital ratio under the severely adverse scenario plus four quarters of planned common stock dividends, expressed as a percent of risk-weighted assets with a 2.5 percent floor.

The first final rule requires the Board to invite public input annually on the stress test scenarios and any material model changes. It updates the policy statements that guide scenario design and the content of results disclosed to firms, adopts the supervisory models that will be used for the 2027 stress test, and adjusts the stress test calendar. The rule maintains the jump-off date at December 31 of the year prior to the test. Beginning with the 2028 stress test, material model changes will be proposed by August 31 of the prior year for a public input period of at least 30 days, and the Board will publish descriptions of the models used in each year’s test by May 15.

For firms with large trading books, the rule expands the as-of date range for the global market shock component of the severely adverse scenario from five months to nine months, spanning April 1 to December 31 of the year preceding the stress test. Under the adopted approach, the Board expects to select two global market shock scenarios on the same as-of date each year and to use the shock that produces the largest losses for each firm when calculating that firm’s stress test results.

Two-Year Averaging and the 2027 Stress Test Calendar

The second final rule requires the Board, when calculating stress capital buffer requirements, to average results from the two most recent annual supervisory stress tests for firms subject to the test in both years. Under the calculation described in the staff memo, the Board will average the maximum common equity tier 1 capital ratio declines projected in the two most recent tests with equal weight, then add four quarters of planned dividends for the current year, and finally apply the 2.5 percent floor. Results averaging generally will not apply in the event of a material business plan change. The rule also moves the effective date of new stress capital buffer requirements from October 1 to January 1, providing firms three additional months to comply. The stress capital buffer framework applies to firms subject to Category I, II, III, or IV standards; Category I through III firms participate in the supervisory stress test every year, while Category IV firms generally participate every other year.

The Board will begin averaging stress capital buffer requirements in 2028 so that only models incorporating public input are used in the calculation, and requirements based on averaged capital declines take effect 1. tammikuuta 2029, according to the Board’s effective-dates document. For the 2027 stress test, that document sets a jump-off date of 31. joulukuuta 2026; publication of proposed scenarios for public input by 10. tammikuuta 2027; final scenarios by 28. helmikuuta 2027; a capital plan and company-run stress test deadline of 30. huhtikuuta 2027; publication of final model documentation by 15. toukokuuta 2027; results disclosure and preliminary stress capital buffer notification by 30. kesäkuuta 2027; notification of final stress capital buffer requirements by 30. syyskuuta 2027; and a 1. tammikuuta 2028, effective date for those requirements. The proposed 2027 scenarios are expected to include two global market shock scenarios, and the expanded as-of date window becomes effective for the 2028 stress test.

Capital Impact Estimates and the Fee Income Proposal

Staff analysis in the Board memo estimates that the adopted and proposed model changes alone would reduce the volatility of annual changes in stress capital buffer requirements by about 35 percent, reaching about 50 percent when combined with the volatility final rule. Relative to the results of the 2024, 2025, and 2026 stress testing cycles, the memo states the adopted and proposed changes would have reduced aggregate stress capital buffer requirements by approximately 1 percent of required common equity tier 1 capital. The memo also estimates the adopted model changes would have reduced aggregate common equity tier 1 capital ratio declines under stress by about 25 basis points on average, that the proposed 2027 model changes would have increased those declines by about five basis points on average, and that the volatility final rule would have lowered average stress capital buffer requirements by three basis points.

The memo estimates the transparency final rule will reduce FR Y-14A/Q/M reporting burden by approximately 5,600 hours and that the 2027 proposal will add approximately 3,500 hours, for an overall reduction of about 2,100 hours, while the volatility final rule is not expected to affect reporting burden. The Board received 30 comments on the lokakuu 2025 transparency proposal and 16 comments on the huhtikuu 2025 volatility proposal from banking organizations, trade associations, public interest groups, and private individuals.

The separate proposal requests comment on a revised noninterest income model intended to better capture business model diversity across firms in generating fee income; if adopted, it would replace the noninterest income model being finalized in the same package, and comments are due 60 days after publication in the Federal Register. The final models for the 2027 stress test fully replace the current pre-provision net revenue model suite, adopt an interim noninterest income model with segmentation by firm type such as global systemically important banks and foreign banking organizations, use external ratings from S&P, Fitch, and Moody’s (MCO ) to determine which sovereign counterparties are excluded from the largest counterparty default component, and update the calculation of the valuation allowance for deferred tax assets.

“The stress test is an essential component of our regulatory capital framework,” said Vice Chair for Supervision Michelle W. Bowman. “Today’s changes preserve its resilience by ensuring that it is transparent, granular, and risk-sensitive.”

Governor Michael S. Barr said in a statement on the transparency final rule that he cannot support it, arguing that disclosure of the stress test models and annual public comment processes on model changes and scenarios will make the tests less responsive to emerging risks and allow banks to optimize their balance sheets to the test rather than focusing on underlying risk. “Over time, the rule will reduce the dynamism, rigor, conservatism, and credibility of the stress test and thus undermine financial stability,” he said. Barr noted that he has long supported using multiple scenarios for the global market shock and taking into account the larger of the losses from those scenarios, as the final rule provides.

Governor Lisa D. Cook said in her statement that she is optimistic the finalized framework preserves the Board’s capacity to administer a trustworthy, effective stress testing regime, citing policy design features aimed at maintaining rigor by reducing the potential for gaming or window-dressing behavior. She cautioned that the scenarios must remain sufficiently rigorous to continue to warrant market confidence, and said she sees significant benefits to using exploratory stress scenarios drawn from a wider range of economic conditions than those contemplated in the annual tests that determine stress capital buffers.