The Federal Reserve said it is considering major changes to its annual banking “stress tests” in light of recent legal developments, including allowing lenders to provide feedback on the models used.
In a statement released last week, the Fed said it will soon seek public comment on significant changes to improve the transparency of testing and reduce the volatility of resulting capital requirements.
The stress test assesses the resilience of large banks by estimating their losses, revenues and capital levels under a hypothetical recession scenario that changes each year. Capital acts as a cushion to absorb losses and allows banks to continue lending to households and businesses even during a recession. Since its inception more than 15 years ago, the big banks in the stress test have more than doubled their capital levels, an increase of more than $1 trillion, according to the Federal Reserve.
The Fed will seek public input on all models that determine the hypothetical losses and revenues of stressed banks. The BC also intends to average the results over two years to reduce the year-over-year changes in capital requirements that result from the stress test.
