- The Fed is looking to make “comprehensive changes” to its annual stress test for banks in 2025. The stress test is important in helping evaluate the resilience of large banks in the event of a recession.
The Federal Reserve may overhaul its annual stress tests for large U.S. Banks to reduce the volatility of the results, but also make them more transparent. While the Fed did not offer specifics beyond general processes it’s considering, it did say in a statement the goal was not to “materially affect overall capital levels.”
“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.”
The Fed’s stress test is designed to evaluate the resilience of large banks by creating a hypothetical scenario that changes every year and estimating what would happen to the bank’s capital levels, revenue, and losses. As the Fed points out, “capital acts as a cushion to absorb losses and allows banks to continue lending to households and businesses even during a recession.”
In the last annual stress test of America’s 31 largest banks released June 26, the “worst hit” was Goldman Sachs. But even then, Bank of America still considered it a buy. “We remain constructive on the stock,” it said.
The Fed introduced this stress test more than 15 years ago. It says over that span, “large banks in the stress test have more than doubled their capital levels, an increase of more than $1 trillion.”
The Federal Reserve Board will begin taking public comments on the “comprehensive changes to the stress test” in early 2025.