Stress tests

The Federal Reserve Friday issued a set of proposed changes to its stress testing program for the largest banks that would disclose the central bank's back-end stress testing models, a move that the Fed had long opposed out of fear of making the tests easier for banks to pass.

Federal Reserve Vice Chair for Supervision Michelle Bowman said in a speech Tuesday that the central bank would unveil proposed revisions to its stress testing regime "in the next week or so."

In a unanimous vote, the Board of Governors moved to lower Morgan Stanley's stress capital buffer requirement to 4.3%, down from a preliminary 5.1% based on this year's stress test results.

Federal Reserve Governor Michael Barr warned that subjecting the stress testing models to the notice and comment process could lead them to "ossify."

After passing the Federal Reserve's stress tests with high marks, large banks announced dividend increases. In some cases, they also said the Fed had conceded that certain prior calculations needed to be revised.

Starting at 4:30 p.m., the 22 large banks that were stress-tested by the Fed can release information about their plans for dividend increases and share repurchases.

While banks will likely increase near-term dividend plans, analysts and investors are more focused on the long-term outlook for capital requirements from regulators.

The largest U.S. banks took less of a capital hit under the Federal Reserve's hypothetical stress scenario than they did last year, but averaging the two sets of results could impact next year's regulatory requirements.

Analysts are predicting stronger results this year after a disappointing outcome in 2024.

Despite its commitment to change its stress testing program, the Federal Reserve is defending its current practices in court. That argument raises thorny legal questions about whether stress tests are more like rules or adjudications.