Fed to seek public comment on changes to bank stress tests

The Federal Reserve stated: “In view of the evolving legal landscape, the Federal Reserve Board will soon seek public comment on significant changes to improve the transparency of its bank stress tests and to reduce the volatility of resulting capital buffer requirements.The Board’s stress test evaluates the resilience of large banks by estimating their losses, revenue, 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 over 15 years ago, large banks in the stress test have more than doubled their capital levels, an increase of more than $1 trillion. The Board intends to propose changes that include, but are not limited to: disclosing and seeking public comment on all of the models that determine the hypothetical losses and revenue of banks under stress; averaging results over two years to reduce the year-over-year changes in the capital requirements that result from the stress test; and ensuring that the public can comment on the hypothetical scenarios used annually for the test, before the scenarios are finalized. These proposed changes are not designed to materially affect overall capital requirements.” Publicly traded large cap banks include Bank of America (BAC), Citi (C), Goldman Sachs (GS), JPMorgan (JPM), Morgan Stanley (MS), U.S. Bancorp (USB) and Wells Fargo (WFC).