The Bank Policy Institute (BPI) and the U.S. Chamber of Commerce Center for Capital Markets Competitiveness have expressed concerns over the Federal Reserve's proposed changes to stress tests that determine banks' capital requirements. In a comment letter filed today, they urged the Fed to avoid creating unnecessary uncertainty with these changes.
Sarah Flowers, BPI senior vice president and senior associate general counsel, stated, "This proposal is a constructive first step in improving the stress tests, but more work remains to be done." She emphasized the need for resolving uncertainties caused by overlapping timelines between the proposal and the release of stress test results. Flowers also highlighted that adjustments are necessary so that when banks take actions to reduce risk, their capital requirements decrease while their lending capacity increases.
The proposal aims to average bank stress test results to mitigate volatility in capital requirements. This move is part of the Fed's broader effort to improve transparency by subjecting its stress testing framework to public input. A legal challenge was filed by BPI and co-plaintiffs in December 2024 seeking full transparency on the Fed’s models and scenarios used in stress tests. The Fed has agreed to pause legal proceedings until August 1, 2025.
The letter calls for several key changes to align with reducing volatility in banks’ capital requirements. One issue is timing; with the comment period ending just before banks receive new stress test results on June 27, there is uncertainty about whether indicative Stress Capital Buffer (SCB) requirements announced shortly after will remain effective as of October 1.
Another concern is preventing unnecessary volatility and costs related to credit. The proposal should allow banks experiencing a decrease in SCB requirements to fully recognize it rather than averaging it with previous years' results. This would free up capital for lending and other economic activities.
Additionally, BPI suggests eliminating the dividend add-on component from SCB calculations as it duplicates existing restrictions on dividend payouts when bank capital levels are insufficient.
General comments were also made regarding improvements needed within the stress testing framework: providing full transparency on models and scenarios; making necessary improvements to pre-provision net revenue model components; establishing rules for designing stress test scenarios; recognizing collateral value in forecasting models; resolving overlaps between Basel capital framework and stress testing.
The Bank Policy Institute represents universal banks, regional banks, and major foreign banks operating in the United States through research analysis on regulatory topics while advocating for cybersecurity measures within financial services industries.
Tara Payne can be contacted at tara.payne@bpi.com for further information or access a copy of this letter.