Changes in annual stress tests for large banks – including by averaging test results over two consecutive years – were issued for public comment late Thursday by the Federal Reserve.
In a release, the agency said the proposed changes in the request for comment touch on key areas: averaging the results to reduce the year-over-year changes in the capital requirements that result from the test, and; delaying the annual effective date of the stress capital buffer requirement from Oct. 1 to Jan. 1 of the following year. The Fed that would give banks additional time to adjust to their new capital requirements.
The Fed said it was also proposing making targeted changes to streamline its stress test-related data collection. The proposed changes are not designed to materially affect overall capital requirements, the Fed said.
“In recent years, the framework of administrative law has changed significantly,” the Fed stated. “As previously announced, the Board analyzed the current stress test in view of those changes and determined the test should be modified in important respects to improve its resiliency.”
The agency asserted that the changing hypotheticals of the test (which evaluates the resilience of large banks by estimating their losses, revenue, and capital levels under a hypothetical severe recession scenario) means the results also change and introduce volatility each year. Those results are critical for banks, the Fed said, since they in part determine the calibration of the stress capital buffer (SCB), one component of the amount of capital the banks must hold to absorb losses.
The Fed reported that more changes are coming. Later this year, it said, it will propose improving the transparency of the stress test. That includes disclosing and seeking public comment on the models that determine the hypothetical losses and revenue of banks under stress. The Fed also wants to give the public the opportunity to comment on the hypothetical scenarios before they are finalizing.
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