The Federal Reserve has finalized reforms to its bank stress-testing framework that includes requirements for public input on annual stress-test scenarios and material model changes. In a new insight, Director of Financial Services Policy Thomas Kingsley reviews the reforms, and discusses the significance of introducing a public comment process as well as potential challenges.

He concludes:

The Federal Reserve’s final reforms largely turn its 2025 proposals into policy, pairing greater transparency around stress-test scenarios and models with measures intended to make capital requirements less volatile from one year to the next. That is a meaningful improvement in predictability, particularly for institutions making capital-allocation decisions under a framework in which supervisory assumptions can have direct consequences for lending and distributions. Yet it does not resolve the more fundamental problem of relying on a highly discretionary hypothetical exercise to determine how much capital banks must hold. The reforms may make that process more transparent and somewhat less volatile, but the coming stress cycles will ultimately determine whether greater procedural openness translates into a more disciplined regulatory framework or simply a more visible – and gameable – exercise of supervisory discretion.

Read the analysis.