The Federal Reserve will consider final revisions to its stress test overhaul in the coming weeks, and issue a new proposal for modeling noninterest income as a part of the annual exercise, Vice Chair for Supervision Michelle Bowman said in a speech Sept. 18.
The central bank issued two proposals in 2025 to change the stress tests, which are used to determine a component of big banks' capital requirements based on losses estimated for individual banks during a hypothetical severe recession.
One proposal would average results over two years in setting the stress capital buffers (SCBs) in an effort to reduce volatility in the requirements. Under the other proposal, the Fed would publish detailed information on its models and scenarios and incorporate public feedback.
In her speech, Bowman highlighted public comments on the proposals that recommended using balance sheet levels in the stress tests prior to the annual publication of proposed scenarios, and that recommended "incorporating two global market shock scenarios on the same as-of date, with the larger loss used to calculate the SCB."
She said the forthcoming proposal on noninterest income was informed by public feedback and "would better capture business diversity across firms and would replace the existing noninterest income model for the 2027 stress test."
Stress test results in 2026 were not used to determine new SCBs as the Fed worked on its overhaul.
Bowman also described a plan for additional regulatory stress tests that will be used to surface risks without determining capital requirements.
This approach would include scenario stress testing to probe idiosyncratic risks and reverse stress testing, where "firms design a scenario that would materially impair their financial condition," Bowman said. The results of these exercises would not be made public and would involve dialog between supervisors and banks comparing findings against banks' own internal analyses.
Such an approach "will help inform how best to focus our supervisory attention across our large bank portfolios," Bowman said, and could have driven prompt action to address vulnerabilities that led to the failure of Silicon Valley Bank.
The Fed has previously conducted "exploratory" analyses that did not impact bank capital requirements, and where it did not publish results for individual banks, as a part of its stress test process.
In the speech, Bowman also said the Fed expects to make final "before the end of the year" landmark proposals published in March to change capital rules.
