US Federal Reserve's Michelle Bowman says changes to bank stress test coming soon

The Federal Reserve is set to take a major step towards reshaping how it assesses the financial resilience of the biggest US banks, with Vice Chair for Supervision Michelle Bowman saying the central bank will vote on a final version of its revamped stress test in the coming weeks, Reuters reported.

The overhaul is designed to make the process more transparent and the results more predictable for lenders, addressing long-running complaints from the banking industry about how the exams are conducted.

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Bowman said the changes would "finally close the book on an opaque and unnecessarily unpredictable framework."

The stress tests were introduced after the 2008 financial crisis and are used by the Fed to determine whether major banks can withstand severe economic conditions. Their results also help set additional capital requirements for lenders, Reuters reported.

Fed to reveal more details behind stress tests

Banks have argued for years that the stress tests are subjective and burdensome. The industry sued the Fed in 2024 over the use of the exams, after which the central bank under Bowman proposed changes in October, Reuters reported.

Under the revamped framework, the Fed plans to disclose substantially more information about the models used to identify potential weaknesses at banks. That would include equations, variables and other technical details that the central bank has traditionally kept confidential.

The Fed also plans to provide greater detail about the hypothetical economic scenarios it creates for the annual examinations. Bowman said the additional information would give the public a better understanding of how the testing process works.

Another key change would alter how stress-test results affect banks' capital requirements.

The Fed plans to average the results from a bank's two most recent stress tests when determining its "stress capital buffer". Bowman said the approach would reduce volatility in the amount of capital banks are required to hold from year to year.

The revised process would also allow the public to comment on the testing models.

Bowman targets broader capital-rule changes

Bowman said the Fed also intends to use stress testing to privately alert supervisors to potential weaknesses at individual banks. She noted that banks already conduct multiple internal stress tests and said examiners and lenders should maintain an "open dialogue" about relevant findings.

"I believe there is tremendous value in comparing notes," she said.

The completion of the stress-test overhaul forms part of Bowman's broader push to change capital requirements for banks.

She said the Fed expects to finish work by year-end on two other major capital rules. One involves the Basel framework governing risk-based capital, while the other concerns the additional capital charge applied to globally systemic banks.

The Fed expects the changes to the systemic-bank capital requirement to reduce the amount of capital that large banks are required to hold in reserve, Reuters reported.

Taken together, the initiatives would reshape how the Fed approaches capital requirements, with greater disclosure around stress testing and changes to how banks' capital buffers are determined.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)