Stress tests

The Federal Reserve proposed a rule to average individual banks' stress test results over two years, a measure the central bank says would reduce volatility in bank capital requirements from year to year.

The banking industry groups suing the Federal Reserve over its stress testing practices filed a motion for a summary judgment in the case, arguing that a quick resolution could ensure changes are made prior to the 2026 stress testing cycle.

With the Federal Reserve eyeing changes to its annual examination of large bank resilience, this year's test could be the last of its kind.

The Bank Policy Institute, the American Bankers Association and others said proposed changes would address "some if not all" of banks' concerns about stress tests, but they are filing the lawsuit to preserve their legal right to do so.

Large and regional banks again proved their resiliency in the Fed's annual exams. But analysts noted that a few lenders faced some negative surprises — a development that may scuttle investor hopes for share buybacks by those banks.

The Federal Reserve attributes the uptick in simulated losses in this year's stress test examination to heightened risks on bank balance sheets and higher expense levels. Credit cards and corporate lending were top areas of concern for the central bank.

A recent white paper from former Federal Reserve Gov. Daniel Tarullo suggests that the stress testing regime should be decoupled from bank capital requirements. But if stress testing isn't an effective means of assigning minimum regulatory capital levels, what is?

The Federal Reserve Board's 2024 stress test scenario posits severe market volatility, widening corporate bond spreads and significant declines in asset prices. The scenario comes alongside new exploratory analyses probing additional risks for the first time.

The Federal Reserve vice chair for supervision says the failure of Silicon Valley Bank showed the shortcomings of the current stress testing regime.

On a combined basis, the GSEs performed better under this year's scenario than they did in 2021, but the Federal Housing Finance Agency said changes were still needed.