In addition to stress testing scenarios for 2026, which were finalized on February 4, the Federal Reserve Board issued a new proposal for longer-lasting changes in the annual supervisory exercise mandated by the post-financial-crisis Dodd-Frank Act.
Long sought by the biggest banks – and advocated within the Fed by governors including Randal K. Quarles, who was vice chair for supervision from 2017 to 2021 – the “proposals to enhance the transparency and public accountability of its annual stress test” were spurred by a 2024 lawsuit complaining that the regulator’s opaque models resulted in volatile and sometimes unjustifiably high capital requirements.
“I am disappointed that the board’s actions to address longstanding issues with the stress testing framework were not addressed proactively, but instead only after a lawsuit became inevitable,” Michelle Bowman, the current vice chair for supervision, said on October 24 last year.
Michelle W. Bowman
The Fed took a necessary step “to promote due process and transparency,” Bowman stated, adding that “lack of transparency can lead to uncertainty for banks in capital planning, potential misalignment of capital requirements with actual risks, and limited public understanding and scrutiny of the stress testing process.” Publishing and seeking comment on stress test models and scenario design “would enhance banks’ understanding of their capital requirements, improve the reliability of the supervisory models through public feedback, strengthen market discipline, and increase overall confidence in the fairness and effectiveness of the supervisory stress tests.”
“This is a step in the right direction,” said Alla Gil, CEO of Straterix and author of a November 2025 GARP Risk Insights column, “Building Consensus on Stress Testing: The Fed’s Path to Transparency and Resilience.” “It should reduce the discrepancy [banks experience], but will it reduce it enough?”
Announcing the filing of a comment letter on December 1, the Bank Policy Institute, American Bankers Association and four other financial industry trade groups “commend[ed] the Fed for, for the first time, publishing its proposed 2026 stress test scenarios for public comment and for articulating a more detailed scenario design policy, including guides and a macro model that describe how key variables are calibrated.”
The associations, however, warned against the Fed retaining inordinate discretion in establishing capital requirements, and saw a need for further refinements, for example: “A clearer articulation of the link between the disclosed guides and models for the final scenario paths would further strengthen the credibility of the framework.”
A separate comment letter was planned to address the “broader proposal on the revised framework, including the stress test models and scenario design.” The Fed extended the deadline for those comments by a month, to February 21.
According to S&P Global, the Fed’s proposed changes could facilitate banks’ managing their capital ratios closer to their minimum requirements. “However, we wouldn’t expect the changes to have a material negative impact on bank capital or creditworthiness as long as the stress tests aren’t weakened.”
Til Scheurmann
Regarding the 2026 scenarios, the trade groups’ letter said that aspects of the proposed “severely adverse scenario are overly severe and implausible given current market dynamics.”
For 2026, “32 banks will be tested against a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets,” the Fed said. U.S. unemployment in the scenario rises to a peak of 10% and is accompanied by “severe market volatility, a widening of corporate bond spreads, and a collapse in asset prices.”
The Fed will not change stress capital buffer requirements until next year to allow for public feedback.
Til Schuermann, global head of finance and risk at Oliver Wyman, sees the capital relief provided by 2026 stress tests as neither significant nor surprising, given the conservative nature of models since the financial crisis. “Anybody who is very worried about financial stability and bank resilience would prefer more severe scenarios that banks have to survive than milder ones,” he said.
He pointed to the 2026 stress tests’ significantly shorter liquidity horizons for some less-liquid securities such as municipal and corporate bonds, indicating the Fed anticipates banks being able to sell the instruments sooner during market stress.
“For securitized products, I think those changes are a bit aggressive,” he said, noting their liquidity horizon was shortened to three months from 12 months.
Fed Governor Michael Barr, who stepped aside as vice chair for supervision before Bowman was elevated in June, opposed the October “package of changes” to the supervisory stress test, laying out 10 points. Among them: The “disclosure and comment process could lead [models] to ossify, causing the dynamism and rigor of the stress test program to fade”; bank capital would be lowered; and “banks are likely to game the capital requirements using the newly revealed details of the models,” by shifting to riskier assets where the disclosed models underestimate risks compared to the banks' assessments and engaging in “window dressing.”
Michael S. Barr
Former Vice Chair Quarles acknowledged, in November 2018 at the Brookings Institution, “some risk that firms will use knowledge from additional transparency about the stress test to engage in transactions that are solely designed to reduce losses in the test, but that do not truly reduce risk in their portfolios. As supervisors, however, this is something that we can guard against through the regular examination process. We will closely monitor changes in firms' portfolios and take appropriate actions to ensure firms are holding sufficient capital, and have sufficient controls and governance, in light of the risk characteristics of their activities.”
Barr, in a September 2025 speech to the Peterson Institute for International Economics, pointed out that since the Global Financial Crisis, large banks’ risk-based common equity capital ratios had jumped from 5% to 12% or more, while “their ability to measure, monitor and manage their own risks” meaningfully improved. “The stress test has directly contributed to both.”
He said two important points are omitted in the transparency arguments: “First, the Federal Reserve already provides substantial information about the design of the test and has expanded those disclosures over time. Banks are far from uninformed . . . Second, what critics call ‘transparency’ is not disclosure of basic information about the rigor and methodology of the test essential for its credibility; instead, it is the equivalent of handing out the questions to the test in advance,” thus “undermin[ing] the rigor of the test.”
In short,” Barr asserted, “the framework strikes a deliberate balance: providing banks with enough information about scenarios and models to ensure fairness and accountability, while preserving the rigor that makes the stress test an effective safeguard.”
“I’m not concerned yet about stress tests swinging in the direction of becoming too mild,” Scheurmann said, “but if it continues in that direction I’m going to start to worry.”
Gil of Straterix suggested the Fed could develop stress-test benchmarks based on high-level data stemming from current regulatory reporting and an analytical foundation shared with the banks. Each bank’s vulnerabilities could be identified; the Fed could determine the most common stress scenarios to use as benchmarks, and, depending on a bank’s variance from the benchmarks, its specific capital buffer.
Alla Gil
The Fed should continue issuing multiple exploratory scenarios, such as the artificial-intelligence bubble bursting, Gil continued, which do not impact capital buffers but help detect potential weaknesses.
“If the probability of that scenario is 1% today, you don’t do anything. But you keep watching and put a contingency plan in place. The Fed releasing more exploratory scenarios gives everyone a warning.”
Gil said two other appropriate exploratory scenarios are collapse of private credit and a broad downgrade of AAA CLOs (collateralized loan obligations) similar to what happened in the wake of the financial crisis. In practice, the move to somewhat milder models could reduce risk by shifting lending more to regulated institutions.
She observed that conservative stress tests since the financial crisis have resulted in banks lending less to smaller companies and other riskier borrowers, with private-credit entities filling the void. “Allowing private credit to keep growing exponentially could bring us to a much worse crisis, so maybe it’s better to enable banks to lend more.”