PROPOSED 2026 STRESS TEST SCENARIOS IMPROVE TRANSPARENCY, BUT LEAVE KEY QUESTIONS ON FED DISCRETION

The following information was released by the Financial Services Forum:

The Federal Reserve's proposed 2026 stress test scenarios reflect a welcome effort to enhance transparency and public accountability, the Bank Policy Institute, American Bankers Association, Financial Services Forum, Securities Industry and Financial Markets Association, International Swaps and Derivatives Association and Institute of International Bankers said in a comment letter submitted today.

The associations commend the Fed for, for the first time, publishing its proposed 2026 stress test scenarios for public comment and for articulating a more detailed scenario design policy, including guides and a macro model that describe how key variables are calibrated. These actions respond constructively to longstanding calls for the Fed to bring its stress testing models and scenarios into the Administrative Procedure Act's notice-and-comment framework and reflect a serious effort to increase public insight into the process. Still, the scenarios, which in many cases replicate scenarios from past stress tests and were established before the new Fed guidelines, would benefit from some revisions. For example, the scenarios and associated models that the Federal Reserve uses to design the scenarios often compress the timelines of observed stress periods to achieve peak-level stress calibrations over a shorter number of quarters than is reflected in historical precedents.

Open questions remain on how the Fed will exercise its discretion on scenario design in practice. Greater clarity and firmer guardrails on how that discretion is applied year to year would further bolster the framework's credibility and ensure that bank capital requirements are based on a coherent and plausible foundation.

The Enhanced Transparency NPR and the publication of the Proposed 2026 Scenarios for public comment represent an improvement in the overall transparency and accountability of the Federal Reserve's stress testing processes. However, the proposed framework would grant inordinate discretion to the Federal Reserve, without requiring sufficient explanation for its design choices year-to-year," the associations stated in the letter.

Background. The Fed on Oct. 24, 2025, issued proposals to increase transparency and accountability in the stress testing process, in line with BPI and co-plaintiffs' 2024 legal challenge, which called for the Fed to subject its stress testing scenarios and models to public comment under the Administrative Procedure Act.*

Today's comment letter responds to the proposed 2026 stress test scenarios.

A separate comment letter will address the Fed's broader proposal on the revised framework, including the stress test models and scenario design. The Fed extended the comment deadline on this proposal to Feb. 21, 2026.

Why It Matters. The proposed framework will drive how the central bank establishes binding capital requirements that determine the cost of credit in the economy. The design choices underpinning models and scenarios ultimately drive the cost of loans and financing. With insufficient explanation of design choices, the stress tests could continue to produce volatile results year-to-year, distorting the cost of financial intermediation.

The stress testing framework is not the sole driver of banks' capital requirements. Given the interplay between stress tests and other parts of the capital framework, the importance of coherent stress test scenarios is critical.

Transparency is not simply about disclosing more information, but also about explaining how that information is used in decision-making so that stakeholders can understand and, where appropriate, comment on the choices the Fed makes in scenario design. A clearer articulation of the link between the disclosed guides and models for the final scenario paths would further strengthen the credibility of the framework.

Specific Concerns. The associations highlight several instances where more explanation would be beneficial in the proposed scenarios. For example:

The Fed has chosen to calibrate variables for which it retains flexibility near or in the upper one-third of their ranges of severity. It does not explain how it arrived at this severe calibration.

The 2026 severely adverse scenario also results in severe shocks across asset classes simultaneously without appearing to take into account the recent dynamics in these markets. The trajectories of several of the modeled variables reflect deviations from the macroeconomic model that are not described.

The Global Market Shock, a market risk element applied to banks with large trading operations, provides a significant level of discretion in its methodology. The effect of the Federal Reserve's chosen percentile level for a specific shock may translate to vastly different severities of the shocks, with direct effects on binding capital requirements for the covered banks. Further explanation is warranted on how the Fed will select the severities of these shocks each year.

The associations urge the Fed to build on its progress by providing more detail on how it will choose points within the permitted ranges for key variables, including how current economic and financial conditions, historical experience and model outputs inform those choices.

* This legal challenge was filed in December 2024 by the Bank Policy Institute, the American Bankers Association, the U.S. Chamber of Commerce, the Ohio Bankers League and the Ohio Chamber of Commerce.

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About Bank Policy Institute

The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud and other information security issues.

About American Bankers Association

The American Bankers Association is the voice of the nation's $25.1 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $19.7 trillion in deposits and extend $13.2 trillion in loans.

About Financial Services Forum

The Financial Services Forum is an economic policy and advocacy organization whose members are the eight largest and most diversified financial institutions headquartered in the United States. Forum member institutions are a leading source of lending and investment in the United States and serve millions of consumers, businesses, investors, and communities throughout the country. The Forum promotes policies that support savings and investment, financial inclusion, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.

About Securities Industry and Financial Markets Association

SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry's nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

About International Swaps and Derivatives Association

Since 1985, ISDA has worked to make the global derivatives markets safer and more efficient. Today, ISDA has over 1,000 member institutions from 78 countries. These members comprise a broad range of derivatives market participants, including corporations, investment managers, government and supranational entities, insurance companies, energy and commodities firms, and international and regional banks. In addition to market participants, members also include key components of the derivatives market infrastructure, such as exchanges, intermediaries, clearing houses and repositories, as well as law firms, accounting firms and other service providers. Information about ISDA and its activities is available on the Association's website: www.isda.org. Follow us on LinkedIn and YouTube.

About Institute of International Bankers

The Institute of International Bankers (IIB) represents the U.S. operations of internationally headquartered financial institutions from more than 35 countries around the world. The membership consists of international banks that operate branches, agencies, bank subsidiaries, and broker-dealer subsidiaries in the United States. The IIB works to ensure a level playing field for these institutions, which supported $5.4 trillion in foreign direct investment by underwriting more than 70% of debt issuance in the United States by internationally headquartered companies over the last four years. These institutions also underwrote more than 40% of U.S. financing raised since 2020 and comprise the majority of U.S. primary dealers.