The Federal Reserve (Fed) of the United States has greenlit a series of changes to its stress tests aimed at assessing the capital strength of financial entities in the face of a possible recession, increasing the transparency of its components in response to the claims of the banking sector.
The initiative provides that the Fed will gather public opinion to define the scenarios of the stress tests and for any relevant modification of the models used, while reviewing the framework that governs the design of hypothetical scenarios and setting the models that will be applied starting in 2027.
Additionally, the capital requirements calculated for stress situations will be based on the average of the two most recent annual supervisory stress tests, with the intention of reducing the volatility from year to year in these capital requirements by around 50%, without significantly altering the required levels.
"The stress test is an essential component of our capital regulatory framework. The changes implemented today preserve its strength by ensuring that it is transparent, detailed, and sensitive to risk. The public will now have greater assurance that the risks taken by banks will be adequately reflected in the losses of their stress tests and in their capital requirements," indicated the Vice Chair of Supervision, Michelle Bowman.
Despite everything, the decision was approved with a single vote against, that of Governor Michael Barr, who considered that the new rules will lead to a reduction in the "dynamism, rigor, conservatism, and credibility of the stress test, thereby undermining financial stability."
"The final rule will significantly weaken the stress test and, consequently, banking resilience. I am deeply concerned that these changes will result in a reliance on a stress test that lacks credibility and can no longer effectively assess the capital adequacy of the largest banks, thus putting our financial system and our economy at risk," he emphasized.