The Federal Reserve voted 6-1 to pass stress test reforms: capital requirements will be halved in terms of volatility, but the sole dissenting vote warned of compromised resilience.

The Federal Reserve officially passed major reforms to the annual bank stress tests by a 6-1 vote, bringing an end to years of maneuvering among Wall Street's big banks.

On September 30, the Federal Reserve formally approved two final rules aimed at increasing the transparency and public oversight of stress tests and reducing the volatility of related capital requirements. These two rules are largely consistent with the draft guidelines released in 2025.

Under the new rules, the Federal Reserve will publicly solicit comments on stress test scenarios and significant model changes, and update the hypothetical scenario framework, test calendar, and global market shock component. The Fed stated that the changes are expected to reduce the annual volatility of capital requirements by approximately 50% and will not have a material impact on overall capital requirements.

Michael Barr, the only Federal Reserve governor to vote against the reforms, warned that the changes would "significantly weaken stress testing, thereby weakening banks' resilience." Christopher Appel, a former Federal Reserve official and director of banking policy at the think tank Better Markets, also expressed skepticism about the reforms' actual effectiveness.

The Federal Reserve Board of Governors conducts stress tests regularly to ensure that large banks have sufficient capital to reliably extend loans to households and businesses, even during severe economic downturns. Previously, in December 2024, the Board announced it would optimize its stress testing methodology to further enhance the resilience of the financial system.

Key changes: Increased transparency, bi-annual average calculation begins.

In a statement, Federal Reserve Vice Chair for Supervision Michelle Bowman said the reforms "maintained resilience by ensuring the transparency, granularity, and risk sensitivity of stress tests," and that the public will have greater assurance that the risks undertaken by banks are adequately reflected in stress losses and capital requirements.

The content of the two final rules is largely consistent with the 2025 proposal.

First , the Federal Reserve will invite public feedback annually on stress test scenarios and major model changes, and will simultaneously update the hypothetical scenario design framework, adjust the test calendar, and update the global market shock component applicable to large transaction book banks. The banks involved will undergo two global market shock tests annually, and the Federal Reserve will calculate the test results based on the scenario that produces the greatest loss.

Second , when calculating the stress capital buffer requirement, the Federal Reserve will take the average of the results from the two most recent annual tests for institutions that have participated in stress tests for two consecutive years. To ensure that only models incorporating public opinion are used in the calculation, this averaging mechanism will officially take effect in 2028.

The Federal Reserve also announced that it is seeking public comment on improvements to its non-interest income model, aiming to better capture the differences in revenue generation methods among various bank business models. The comment period is 60 days after the article is published in the Federal Register.

Industry competition: Litigation accelerates reform

This reform is the result of years of pressure from the banking industry.

The stress testing system was established after the 2008 financial crisis to assess the capital adequacy of large banks under hypothetical economic recession scenarios.

In December 2024, the Federal Reserve announced that it would revise the test, but in the same month, industry groups, including JPMorgan Chase and Goldman Sachs, filed a lawsuit against the Federal Reserve, demanding greater transparency and participation in the rule-making process.

Organizations such as the Bank Policy Institute and the American Bankers Association welcomed the new rules, stating in a joint statement:

Transparency and public participation have created a more robust stress testing framework, which helps improve accuracy, enables regulated banks to conduct more prudent capital planning, and brings positive benefits to the national economy.

Opposing voices: The test may become an "empty ritual"

Despite widespread support for the reforms, critics continue to question their direction.

Federal Reserve Governor Michael Barr believes that this reform will substantially weaken the binding force of stress tests, thereby reducing the overall resilience of the banking system.

Former Federal Reserve official Christopher Appel takes a more fundamental critical stance, arguing that the Fed should not continue to rely on "this increasingly hollow exercise" to set capital requirements, but should instead use stress testing as a flexible regulatory tool to uncover vulnerabilities, challenge bank assumptions, and drive corrective action.

Earlier this year, major banks passed their annual stress tests again and immediately returned capital to shareholders on a massive scale, breaking the record set in 2019 with the amount paid out through dividends and share buybacks.

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