Federal Reserve to Seek Public Comment on Stress Test Transparency Enhancements and Volatility Reduction
Washington, D.C. (December 23, 2024) – The Federal Reserve Board (FRB) today announced its intention to seek public comment on proposed changes to the Comprehensive Capital Analysis and Review (CCAR) stress testing process used by the Federal Reserve System to evaluate the resilience of the nation’s largest banks.
The proposed changes are intended to enhance the transparency of the stress testing process and reduce the volatility of resulting capital requirements.
In recent years, the legal landscape and framework of administrative law have evolved, leading to increased scrutiny of agency actions, including stress tests. The FRB recognizes the importance of ensuring that its stress testing process is transparent and accountable, and that the resulting capital requirements are both prudent and fair.
The proposed changes include:
- Enhanced transparency: The FRB will provide more detailed information about the stress testing process, including the models and assumptions used. This information will be made available to the public and will be subject to public comment.
- Reduced volatility: The FRB will implement changes to the stress testing process to reduce the volatility of resulting capital requirements. This will be achieved by using a more forward-looking approach and by smoothing out the impact of changes in economic conditions.
The FRB believes that these changes will improve the transparency and effectiveness of the CCAR stress testing process. The FRB will seek public comment on the proposed changes before finalizing them.
Background
The CCAR stress test is an annual exercise conducted by the FRB to assess the resilience of the nation’s largest banks. The test simulates a severe economic downturn and assesses the adequacy of banks’ capital levels under such conditions.
The results of the stress test are used to inform the FRB’s decision on whether to approve banks’ capital plans. Banks that fail the stress test may be required to raise additional capital.
The CCAR stress test has been criticized by some for being too opaque and for leading to excessive volatility in capital requirements. The proposed changes are intended to address these concerns.
Public Comment
The FRB will seek public comment on the proposed changes for 60 days. Comments may be submitted online or by mail.
The FRB will consider all public comments before finalizing the changes. The FRB anticipates finalizing the changes in early 2025.
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