FEDERAL RESERVE LIFTS VEIL ON STRESS TEST MODELS

The following information was released by the American Bankers Association:

The Federal Reserve issued a significant proposal today to improve the accuracy and transparency of its stress testing models and the stress-testing framework more generally. Stress testing is the most risk-sensitive component of the regulatory capital regime and directly affects the cost and availability of loans for American households and businesses. Erratic stress test results based on opaque and confusing methodologies damage the banking system without making it safer. Today's proposal seeks to remedy these problems, yielding a more rational allocation of bank capital and, thereby, supporting financial resilience and U.S. economic growth.

The Bank Policy Institute, the American Bankers Association, the Ohio Bankers League and the Ohio Chamber of Commerce (the associations) issued a joint statement.

In December 2024, we initiated litigation because the Federal Reserve was operating its stress test in violation of the Administrative Procedure Act and due process. As a result of today's proposal, not just banks but all interested parties will have the opportunity to review models of great consequence for the U.S. economy and provide informed comment on how those models could be improved to better reflect risk. The flaws in supervisory models and lack of transparency have caused unnecessary volatility in capital requirements and imposed unwarranted costs on the economy by reducing market liquidity, limiting the availability and increasing the cost of credit, and ultimately slowing job creation and economic growth. Today is not just a good day for the rule of law but also a good day for economic growth.

Today's proposal also sets the Federal Reserve on a path toward permanent improvements to the models and the Federal Reserve's process for conducting annual stress tests. Going forward, we expect the Federal Reserve to consider the public's comments and finalize rules that will ensure that in 2026 and future years, the stress tests are conducted in a manner more reflective of stress tests' importance to the economy.

The purpose of the Federal Reserve's stress tests is not just to determine whether a bank "passes" or "fails," but to set the minimum amount of capital each bank must hold. These requirements are driven by complex models that, until now, have been kept secret. The U.S. Constitution and the Administrative Procedure Act require agencies to give public notice and an opportunity to comment on significant regulations. After years of advocating for greater transparency, the associations filed a lawsuit in late 2024.

Today's announcement:

Discloses the stress test models and invites public comment;

Discloses the proposed stress test scenario for 2026 and invites public comment on that proposed scenario;

Establishes a process to solicit public feedback on the annual stress test scenarios and future changes to the models;

Seeks comment on the scenario design framework; and

Introduces more objective standards, including for the global market shock.

The associations are reviewing today's proposal and may agree to extend the litigation stay as the Federal Reserve works toward fulfilling its commitments to the public and the federal district court overseeing the litigation.

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About the American Bankers Association

The American Bankers Association is the voice of the nation's $25 trillion banking industry, which is composed of small, regional and large banks that together employ approximately 2.1 million people, safeguard $19.7 trillion in deposits and extend $13.1 trillion in loans.