The Federal Reserve plans to reform bank stress tests, allowing Wall Street to learn the standards in advance and provide feedback.

Wall Street banks may be able to learn upcoming stress test standards ahead of time under a new plan considered by the Federal Reserve. This initiative aims to comprehensively overhaul the Fed’s flagship bank stress testing system.

According to documents released on Friday, the Fed’s proposal aims to improve the design of several models, including those for credit losses, operational risk, and securities-related models. In addition, before finalizing the “severely adverse scenario” for the next stress test round, the Fed plans to seek industry feedback in advance.

The document also published preliminary standards for the 2026 version of the stress test, including the harshest scenario requiring banks to assess how they would respond to a global recession, crashing stock and real estate markets, and U.S. unemployment reaching double digits. Under the new framework, the Fed on Friday announced the most severe scenario assumptions intended for the 2026 stress test:

The scenario assumes a severe global recession, sharp drops in risk asset prices, declining risk-free interest rates, and intense financial market volatility—including stock prices plunging 54% in the first three quarters.

Corporate bond spreads widen to 5.7 percentage points, U.S. unemployment rises to about 10%, real estate prices collapse, and Asia’s economy experiences a sharp slowdown.

As always, the scenario is purely hypothetical for testing purposes and not an economic forecast.

The Fed’s chief bank regulator, Governor Michelle Bowman, said she hopes to formally adopt these reforms after a public comment period and before the 2026 test. The Fed Board already voted in Washington on Friday to officially propose the reforms. In her meeting remarks, Bowman stated:

Currently, stress test models, scenario design frameworks, and specific scenarios are not fully disclosed or open to public comment. This lack of transparency results in uncertainty for banks’ capital planning, leads to possible mismatches between capital requirements and actual risk, and limits public understanding and oversight of the stress testing process.

Under the new plan, the Fed will require regulators to disclose details of the key models and scenarios for each year before the stress test is conducted.

This move was widely expected in the market. Back in April, the Fed proposed another reform: averaging test results over two years and giving banks more time to adjust capital requirements. At the same time, the Fed also announced it would ease test implementation to increase transparency.

In addition, the reform will move the date for balance sheet data used in stress tests from December 31 to September 30. The Fed noted that overall, the adjustments are not expected to have a material impact on participating banks’ capital requirements.

Stress tests were introduced after the 2008 financial crisis as a regulatory measure to assess whether banks can remain resilient during hypothetical economic downturns. Over the years, banks have repeatedly pushed to relax related capital regulations, arguing the rules are overly burdensome and restrict their business flexibility.

Earlier this year, all 22 major U.S. banks successfully passed the annual stress test, paving the way for increased stock buybacks and dividends.

The “Open Book Exam” Debate

The Fed had already announced plans to reform the stress test process back in December, but that same month several industry associations sued the agency, accusing it of “secretly formulating” standards and causing bank capital requirements to become “arbitrary and lacking explanation.” The associations represent firms including JPMorgan Chase, Goldman Sachs, and Bank of America.

After the Fed announced its reform proposal on Friday, the Bank Policy Institute and the Financial Services Forum both issued statements welcoming the move.

However, not all Fed officials support the reforms. Former chief Fed regulator and current board member Michael Barr said in a speech that he opposes disclosing test details in advance, arguing that it undermines the credibility of the tests.

This new model risks turning stress testing into a rigid and formalistic process, bringing only a false sense of security. Less conservative modeling choices and banks possibly gaming the system could produce overly optimistic test results.

Former Fed banking policy lawyer and current University of Michigan business law professor Jeremy Kress criticized the Fed’s move as a “compromise” in response to banks’ lawsuits:

No law requires stress tests to become an open book exam, letting banks help write the questions. This is entirely a policy choice—and a bad one.

Risk Warning and DisclaimerMarkets are risky, and investments should be made with caution. This article does not constitute personal investment advice and does not take into account the particular investment objectives, financial situation or needs of any individual user. Users should consider whether any views, opinions or conclusions in this article are appropriate to their circumstances. Investing based on this information is at your own risk.