Fed Plans Significant Changes to Bank Stress Tests in Light of Legal Decisions

The Fed stated that in light of recent legal developments, it is considering making significant changes to the annual bank "stress tests," including allowing comments on models used by lenders, which could be seen as a major victory for Wall Street banks.

The Fed also indicated that it might permit lenders to provide inputs for the hypothetical scenarios used in the annual bank health assessments and could average results over two years to reduce annual volatility regarding how much capital banks need to set aside to absorb potential losses.

The tests, established after the 2007-2009 financial crisis, evaluate whether large lenders can withstand an economic shock. These tests, which form the foundation of the U.S. capital regime, determine how much cash lenders need to reserve to cover losses and how much they can return to shareholders.

The Fed mentioned that the proposed changes are not designed to affect overall capital requirements, but rather follow recent court decisions that have significantly altered the administrative legal framework in recent years. "The Fed Board analyzed the current stress test in light of the evolving legal environment and decided to make significant changes to the test to enhance its robustness."