Rule2026-20247
Enhanced Transparency and Public Accountability of the Supervisory Stress Test Models and Scenarios; Modifications to the Capital Planning and Stress Capital Buffer Requirement Rule, Enhanced Prudential Standards Rule, and Regulation LL
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 2, 2026
Effective
November 2, 2026
Issuing agencies
Federal Reserve System
Abstract
The Board of Governors of the Federal Reserve System (Board) has adopted final amendments to Regulations Y, LL, and YY to enhance the transparency and public accountability of the Board's stress testing framework. The Board is also finalizing amendments to the Policy Statement on the Scenario Design Framework for Stress Testing and the Stress Testing Policy Statement. The Board is also announcing that it is finalizing models for the 2027 stress test and proposing for public input additional changes to the stress test models for the 2027 stress test. Finally, the Board is finalizing changes to the stress test data collection (FR Y-14A/Q/M).
Full Text
<html>
<head>
<title>Federal Register, Volume 91 Issue 190 (Friday, October 2, 2026)</title>
</head>
<body><pre>
[Federal Register Volume 91, Number 190 (Friday, October 2, 2026)]
[Rules and Regulations]
[Pages 62870-62933]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-20247]
[[Page 62869]]
Vol. 91
Friday,
No. 190
October 2, 2026
Part III
Federal Reserve System
-----------------------------------------------------------------------
12 CFR Parts 225, 238, and 252
Enhanced Transparency and Public Accountability of the Supervisory
Stress Test Models and Scenarios; Modifications to the Capital Planning
and Stress Capital Buffer Requirement Rule, Enhanced Prudential
Standards Rule, and Regulation LL; Interim Final Rule
Federal Register / Vol. 91 , No. 190 / Friday, October 2, 2026 /
Rules and Regulations
[[Page 62870]]
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Parts 225, 238, and 252
[Regulations Y, LL, and YY; Docket No R-1873]
RIN 7100-AH05
Enhanced Transparency and Public Accountability of the
Supervisory Stress Test Models and Scenarios; Modifications to the
Capital Planning and Stress Capital Buffer Requirement Rule, Enhanced
Prudential Standards Rule, and Regulation LL
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Final rule; amendments to policy statements.
-----------------------------------------------------------------------
SUMMARY: The Board of Governors of the Federal Reserve System (Board)
has adopted final amendments to Regulations Y, LL, and YY to enhance
the transparency and public accountability of the Board's stress
testing framework. The Board is also finalizing amendments to the
Policy Statement on the Scenario Design Framework for Stress Testing
and the Stress Testing Policy Statement. The Board is also announcing
that it is finalizing models for the 2027 stress test and proposing for
public input additional changes to the stress test models for the 2027
stress test. Finally, the Board is finalizing changes to the stress
test data collection (FR Y-14A/Q/M).
DATES: This final rule and policy statements are effective November 2,
2026.
FOR FURTHER INFORMATION CONTACT: Doriana Ruffino, Associate Director
(202) 452-5235, Hillel Kipnis, Assistant Director, (202) 452-2924, John
Simone, Manager, (202) 245-4256, and Theo Pistner, Financial
Institution and Policy Analyst III, (202) 941-1825, Division of
Supervision and Regulation; William Bassett, Senior Associate Director,
(202) 736-5644, Bora Durdu, Deputy Associate Director, (202) 452-3755,
and Anni Isojaervi, Senior Economist, (202) 596-4054, Division of
Financial Stability; Asad Kudiya, Associate General Counsel, (202) 360-
6887, Julie Anthony, Senior Special Counsel, (202) 658-9400, Jonah
Kind, Senior Counsel, (202) 452-2045, Brian Kesten, Senior Counsel
(202) 843-4079, Tara Hofbauer, Senior Attorney (202) 680-2503, and Rye
Salerno, Attorney (240) 374-7788, Legal Division. Board of Governors of
the Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551. For users of TDD-TYY, please call 711 from any
telephone, anywhere in the United States.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Background on Stress Testing
B. Prior Supervisory Stress Disclosures and Policy Statements
C. Supervisory Stress Test Modeling Framework
D. Stress Test Models
E. Overview and Purpose of the Proposal
F. General Summary of Comments
G. Overview of the Final Rule and Final Policy Statements
H. Interactions With Other Proposals
II. Enhanced Disclosure Process
A. Annual Disclosure of Models
B. Model Changes
C. Material Model Changes
D. Annual Disclosure of Scenarios
E. Other Revisions to the Stress Testing and Capital Plan Rules
F. Stress Capital Buffer Requirement Reconsideration Process
III. Revisions to the Stress Testing Policy Statement
A. Supervisory Stress Test Results Disclosures
B. Other Revisions to the Stress Testing Policy Statement
IV. Revisions to the FR Y-14A/Q/M
A. FR Y-14 Supporting Documentation
B. Collection of Mailing Address Information
C. Private Equity
D. Hedges
E. Exchange Traded Funds
F. Credit Card Revenue and Loss Sharing Agreements
G. Stress Test Date Changes
H. Other FR Y-14 Revisions and Comments
V. Changes to the Stress Test Modeling Framework
A. Changes to Stress Test Models
B. Analysis of Final Model Changes
VI. Changes to the Scenario Design Policy Statement
A. Changes to the Background and Overview and Scope Sections
B. Changes to the Content of the Stress Test Scenarios Section
C. Approach for Formulating Macroeconomic Assumptions in the
Baseline Scenario
D. Scenario Narrative, the Recession Approach, and Salient Risks
E. Changes to Construction of Certain Variables in the Severely
Adverse Scenario
F. Scenario Design Principles Derived from Stress Testing
Literature: Severity, Credibility, and Not Adding to Procyclicality
G. Description of Variable Guides in the Severely Adverse
Scenario
H. Global Market Shock
VII. Economic Analysis
A. Baseline
B. Final Policy Changes
C. Analysis of Benefits and Costs of Enhanced Model Disclosure
D. Conclusion
VIII. Administrative Law Matters
A. Paperwork Reduction Act Analysis
B. Regulatory Flexibility Act Analysis
C. Plain Language
I. Introduction
In October 2025, the Board invited public comment on changes to the
Board's stress testing framework and the comprehensive model
documentation for the 2026 stress test, which included proposed changes
to the models relative to the 2025 stress test.\1\ The comprehensive
model documentation is available at <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>. The Board also invited
comment on the proposed scenarios for the 2026 stress test through a
separate notice.\2\ These proposals sought to improve the transparency
and public accountability of the supervisory stress test, while
retaining appropriate risk sensitivity and risk capture in the stress
test, ensuring that the stress test remains an effective tool to
understand and assess risk. The final rule, together with the
finalization of the models for the 2027 stress test, advances these
goals by adopting (1) incorporating public input into the final models
for the 2027 stress test, and (2) disclosure and public input processes
for the scenarios and models used in future stress tests.
---------------------------------------------------------------------------
\1\ See 90 FR 51856 (Nov. 18, 2025) (the ``enhanced transparency
and public accountability of the stress test'' proposal or the
``proposal''). Separately, in April 2025, the Board issued a
proposal that would have amended the calculation of the stress
capital buffer requirement to reduce the volatility of the
requirement (the ``Volatility Proposal''). Final action related to
that proposal is addressed in a separate Federal Register notice.
See 90 FR 16843 (Apr. 22, 2025).
\2\ See 90 FR 51762 (Nov. 18, 2025).
---------------------------------------------------------------------------
A. Background on Stress Testing
1. Stress Testing Framework
Congress enacted the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) in the wake of the 2007-09 financial
crisis.\3\ Section 165 of the Dodd-Frank Act, as amended by section 401
of the Economic Growth, Regulatory Relief, and Consumer Protection
Act,\4\ requires the Board to establish enhanced prudential standards
for nonbank financial companies supervised by the Board and bank
holding companies with $250 billion or more in total consolidated
assets.\5\ The purpose of
[[Page 62871]]
these enhanced prudential standards is to prevent or mitigate risks to
the financial stability of the United States that could arise from the
material financial distress or failure, or ongoing activities, of
large, interconnected financial institutions.
---------------------------------------------------------------------------
\3\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\4\ Economic Growth, Regulatory Relief, and Consumer Protection
Act, Public Law 115-174, 132 Stat. 1296 (2018).
\5\ See 12 U.S.C. 5365(a). In addition, the International
Lending Supervision Act of 1983 provides the Board with broad
discretionary authority to set minimum capital levels for state
member banks and certain affiliates of insured depository
institutions, including holding companies, supervised by the Board.
See 12 U.S.C. 3902(1); 3907(a); 3909(a). Under section 5(b) of the
Bank Holding Company Act of 1956 (Bank Holding Company Act), the
Board may issue such regulations and orders relating to capital
requirements of bank holding companies as may be necessary for the
Board to carry out the purposes of the Bank Holding Company Act. 12
U.S.C. 1844(b). Foreign banking organizations with a U.S. branch,
agency, or commercial lending company subsidiary are made subject by
the International Banking Act of 1978 (International Banking Act) to
the provisions of the Bank Holding Company Act in the same manner as
bank holding companies, see 12 U.S.C. 3106; therefore, the Board is
also authorized under section 5(b) of the Bank Holding Company Act
to impose these requirements on those foreign banking organizations,
including on their U.S. operations. Similarly, with regard to
savings and loan holding companies, section 10(g) of the Home
Owners' Loan Act authorizes the Board to issue such regulations and
orders relating to capital requirements as the Board deems necessary
and appropriate to carry out the purposes of the Home Owners' Loan
Act. See 12 U.S.C. 1467a(g)(1).
---------------------------------------------------------------------------
Section 165(i)(1) of the Dodd-Frank Act requires the Board to
conduct an annual supervisory stress test of nonbank financial
companies supervised by the Board and bank holding companies with $250
billion or more in total consolidated assets to evaluate whether the
firm has the capital, on a total consolidated basis, necessary to
absorb losses as a result of adverse economic conditions.\6\ Section
401(e) of the Economic Growth, Regulatory Relief, and Consumer
Protection Act requires the Board to conduct periodic stress tests for
bank holding companies with total consolidated assets between $100
billion and $250 billion.\7\ Section 165(i)(1) of the Dodd-Frank Act
requires the Board to publish a summary of the supervisory stress test
results.\8\ In 2012, the Board adopted a final rule implementing the
stress test requirements established in the Dodd-Frank Act.\9\
---------------------------------------------------------------------------
\6\ 12 U.S.C. 5365(i)(1).
\7\ 12 U.S.C. 5365 note (Supervisory Stress Test).
\8\ 12 U.S.C. 5365(i)(1)(B)(v).
\9\ See 77 FR 62378 (Oct. 12, 2012).
---------------------------------------------------------------------------
The Dodd-Frank Act also requires bank holding companies with $250
billion or more in total consolidated assets, as well as nonbank
financial companies supervised by the Board, to conduct company-run
stress tests on a periodic basis.\10\ Under the Board's rules, firms
subject to Category I, II, or III standards must conduct company-run
stress tests.\11\ Company-run stress tests provide forward-looking
information to supervisors to assist in their overall assessments of a
firm's capital adequacy, help to better identify downside risks and the
potential impact of adverse outcomes on the firm's capital adequacy,
and assist in achieving the financial stability goals of the Dodd-Frank
Act. Further, the company-run stress tests help improve firms' stress
testing practices with respect to their own internal assessments of
capital adequacy and overall capital planning.
---------------------------------------------------------------------------
\10\ 12 U.S.C. 5365(i)(2).
\11\ See 84 FR 59032 (Nov. 1, 2019); 12 CFR 238.142; 12 CFR
252.53. State member banks with average total consolidated assets of
greater than $250 billion must also conduct company-run stress
tests. 12 CFR 252.13.
---------------------------------------------------------------------------
Each June, the Board publishes the results of its annual
supervisory stress test, including each firm's projected capital
ratios, pre-tax net income, losses, revenues, and expenses, under
hypothetical, severely adverse economic and financial conditions.\12\
These disclosures provide the public with valuable information about
each firm's financial condition and the ability of each firm to absorb
losses considering a stressful economic environment. However, the
supervisory stress test is not designed or intended to be predictive of
future economic conditions.
---------------------------------------------------------------------------
\12\ A firm subject to Category I through III standards must
participate in the supervisory stress test every year, while a firm
subject to Category IV standards is generally required to
participate only every other year. See 12 CFR 217.2; 12 CFR 238.10;
12 CFR 252.5; 84 FR 59032 (Nov. 1, 2019).
---------------------------------------------------------------------------
Following the 2007-09 financial crisis, the Board also made changes
to its capital rule to address weaknesses observed during the
crisis.\13\ These changes included the establishment of a minimum
common equity tier 1 capital requirement and a fixed capital
conservation buffer equal to 2.5 percent of risk-weighted assets.\14\
Large firms also became subject to a countercyclical capital buffer
requirement, and the largest and most systemically important firms--
global systemically important bank holding companies, or GSIBs--became
subject to an additional capital buffer based on a measure of their
systemic risk, the GSIB surcharge.\15\ In 2020, the Board adopted the
stress capital buffer requirement for certain firms.\16\ Because a
firm's stress capital buffer requirement is informed by the firm's
performance under the hypothetical economic conditions modeled by the
supervisory stress test, each firm's stress capital buffer requirement
is tailored to its risk profile.
---------------------------------------------------------------------------
\13\ See generally 12 CFR part 217.
\14\ See 78 FR 62018 (Oct. 11, 2013); 12 CFR 217.11.
\15\ See 80 FR 49082 (Aug. 14, 2015).
\16\ In 2020, the Board finalized a rule to integrate
supervisory stress test results into the capital framework, through
the stress capital buffer requirement. See 85 FR 15576 (Mar. 18,
2020). The stress capital buffer requirement is calculated as the
difference between a firm's starting and lowest projected common
equity tier 1 capital ratio under the severely adverse scenario in
the supervisory stress test plus four quarters of planned common
stock dividends, expressed as a percentage of risk-weighted assets.
See 12 CFR 225.8(f); 12 CFR 238.170(f). The stress capital buffer
requirement framework generally applies to firms with $100 billion
or more in total consolidated assets.
---------------------------------------------------------------------------
Supervisory stress testing and stronger capital requirements have
significantly improved the resilience of the U.S. banking system. Since
2009, the common equity capital ratios of firms subject to the test
have more than doubled, with common equity capital of such firms
increasing by over $1 trillion.\17\ Greater transparency into the
stress test and the calculation of the stress capital buffer
requirement would allow firms to better understand the capital
requirements associated with investment and expansion of different
business lines and would facilitate more effective long-term capital
planning. This, in turn, could enhance firms' ability to supply credit
to households and businesses, ultimately supporting economic growth and
financial stability.
---------------------------------------------------------------------------
\17\ Based on FR Y-9C (Consolidated Financial Statements for
Holding Companies) filings.
---------------------------------------------------------------------------
B. Prior Supervisory Stress Disclosures and Policy Statements
In addition to the annual stress test results disclosure, the Board
has historically published detailed descriptions and information about
the supervisory stress test scenarios and models. This section provides
an overview of the Board's disclosures and policy statements prior to
the proposal.
1. Stress Test Scenarios
The Board's stress test rules have provided that the Board will
notify firms, by no later than February 15 of each year, of the
scenarios that the Board will apply to conduct its annual supervisory
stress test and that firms must use to conduct their company-run stress
tests.\18\ The Board also has provided a narrative description of the
scenarios no later than February 15 of each calendar year.\19\
---------------------------------------------------------------------------
\18\ See 12 CFR 238.132(b); 12 CFR 238.143(b); 12 CFR 252.14(b);
12 CFR 252.44(b); 12 CFR 252.54(b).
\19\ See, e.g., Board, 2025 Stress Test Scenarios (Feb. 2025),
<a href="https://www.federalreserve.gov/publications/files/2025-stress-test-scenarios-20250205.pdf">https://www.federalreserve.gov/publications/files/2025-stress-test-scenarios-20250205.pdf</a>.
---------------------------------------------------------------------------
In 2013, the Board increased the transparency of the scenarios by
finalizing the Policy Statement on the
[[Page 62872]]
Scenario Design Framework for Stress Testing (Scenario Design Policy
Statement), which articulated the Board's approach to scenario design
for the supervisory and company-run stress tests, outlining the
characteristics of the stress test scenarios, and explaining the
considerations and procedures that underlie the formulation of these
scenarios.\20\ The Scenario Design Policy Statement also described the
baseline and severely adverse scenarios, the Board's approach for
developing these two macroeconomic scenarios, and the approach for
developing any additional components of the stress test scenarios. The
Scenario Design Policy Statement explained that the severely adverse
scenario is designed to reflect conditions that have characterized
post-war U.S. recessions (the recession approach). Historically,
recessions have typically featured increases in the unemployment rate,
contractions in aggregate incomes and economic activity, and declines
in inflation and interest rates.
---------------------------------------------------------------------------
\20\ 12 CFR part 252, Appendix A.
---------------------------------------------------------------------------
In the 2013 Scenario Design Policy Statement, the Board explained
that, in light of the typical co-movement of measures of economic
activity during economic downturns, such as the unemployment rate and
gross domestic product, the Board would first specify a path for the
unemployment rate and then develop paths for other measures of activity
broadly consistent with the course of the unemployment rate in
developing the severely adverse scenario. The 2013 Scenario Design
Policy Statement also stated that economic variables included in the
scenarios may change over time, and that the Board may augment the
recession approach with certain salient risks, which would involve
incorporating features that address aspects of the current economic or
financial market environment that represent higher-than-normal risks to
the condition of the banking system.
In 2019, the Board updated the Scenario Design Policy Statement,
increasing the transparency and predictability of the scenarios. The
updates allowed for a smaller-than-usual increase in unemployment if
the stress test were to occur during an economic downturn, a change
that would pass through to reduced severity of other key scenario
variables due to the deference given to historical correlations. The
2019 update also introduced a formula with countercyclical features to
guide the evolution of the ratio of housing prices to disposable income
in the scenario, which provided more predictability in the way that the
stress test would treat business lines affected by changes in house
prices. However, the Board believes that the design of scenarios could
be made more transparent and predictable through the use of additional
guides for certain macroeconomic variables, and the disclosure of
additional detailed information on the methodology used to create the
global market shock component of the severely adverse scenario, as
described below.
2. Trading and Counterparty Components
For a subset of firms, the severely adverse scenario also includes
two additional components: the global market shock component and the
largest counterparty default component.\21\ The global market shock
component is a group of hypothetical shocks to a large set of risk
factors reflecting general market distress and heightened uncertainty
that the Board may require certain firms to include in the severely
adverse scenario.\22\ The Board generally expects that firms with
significant trading activity will consider the global market shock
component as part of its severely adverse scenario and recognize
associated losses in the first quarter of the projection horizon.\23\
The global market shock component has been applied to asset positions
held by the firms on a given as-of date.\24\ In addition, for certain
large and highly interconnected firms, the same global market shock
component is generally applied to counterparty exposures under the
largest counterparty default component.\25\ The largest counterparty
default component is intended to assess the potential losses and
capital impact associated with the default of the largest counterparty
of each applicable firm, and the as-of date aligns with that of the
global market shock component.
---------------------------------------------------------------------------
\21\ See 12 CFR 238.143(b)(2)(i); 12 CFR 252.14(b)(2)(i); 12 CFR
252.54(b)(2)(i). For more information on the scenarios and
components, see Board, 2025 Stress Test Scenarios (Feb. 2025),
<a href="https://www.federalreserve.gov/publications/files/2025-stress-test-scenarios-20250205.pdf">https://www.federalreserve.gov/publications/files/2025-stress-test-scenarios-20250205.pdf</a>.
\22\ Id.
\23\ The global market shock component of the company-run stress
test may apply to firms subject to Category I, II, and III standards
that have aggregate trading assets and liabilities of $50 billion or
more, or trading assets and liabilities equal to or greater than 10
percent of total consolidated assets. See 12 CFR 238.143(b)(2)(i);
12 CFR 252.14(b)(2)(i); 12 CFR 252.54(b)(2)(i). The Board expects to
require this group of firms with significant trading activities to
include a trading and counterparty component in the severely adverse
scenario for the supervisory stress test. See 12 CFR 252, Appendix
A, sections 1(b) and 3.2(a).
\24\ Under the Board's current stress test rules, the global
market shock as-of date must occur between October 1 and March 1.
See 12 CFR 238.143(b)(2)(i); 12 CFR 252.14(b)(2)(i); 12 CFR
252.54(b)(2)(i).
\25\ The largest counterparty default component generally
applies to all firms subject to the global market shock component,
as well as firms with substantial processing and custodial
operations.
---------------------------------------------------------------------------
The design and specification of the global market shock component
differs from the design and specification of the severely adverse
scenario in several respects. First, in alignment with U.S. generally
accepted accounting principles (U.S. GAAP), profits and losses from
trading and counterparty credit positions are measured in mark-to-
market accounting terms in the global market shock, while revenues and
losses from traditional banking activities, as generated under
macroeconomic scenarios, are generally measured using the accrual
accounting method. Second, the timing of loss recognition differs
between the global market shock and the severely adverse macroeconomic
scenario. The global market shock affects the mark-to-market value of
trading positions and counterparty credit losses in the first quarter
of the severely adverse scenario. This timing is based on an
observation that market dislocations can happen rapidly and
unpredictably at any time under stressed conditions. In addition, the
severely adverse scenario has been applied as of December 31 of each
year (the jump-off date), whereas the global market shock as-of date
changes every year (within the window specified in the Board's stress
test rules, as applicable) and does not necessarily coincide with the
year-end. This timing is also based on a scenario assumption that
market dislocations can happen rapidly and unpredictably at any time
during the scenario horizon. Recognizing the global market shock in the
first quarter helps ensure that potential losses from trading and
counterparty exposures are incorporated into firms' capital ratios in
each quarter of the severely adverse scenario.
[[Page 62873]]
3. Stress Test Models
Prior to 2019, the annual stress test results disclosure document
contained an appendix describing the Board's supervisory stress test
models.\26\ In 2019, the Board increased the transparency of the
supervisory stress test models by finalizing the Stress Testing Policy
Statement \27\ and the Enhanced Disclosure of the Models Used in the
Federal Reserve's Supervisory Stress Test (Enhanced Model
Disclosure).\28\ The Stress Testing Policy Statement describes the
Board's policies and procedures that guide the development,
implementation, and validation of the models.\29\ The Stress Testing
Policy Statement also describes the Board's principles for stress test
model design, namely that the system of models used in the supervisory
stress test should result in projections that are (1) independent of
firm projections; (2) forward-looking in that they project future
losses and revenue; (3) consistent and comparable across firms; (4)
generated from simple approaches, where appropriate; (5) robust and
stable; (6) conservative; and (7) able to capture the effect of severe
economic stress. The Board has developed stress test models in
accordance with these principles, which are the foundation for the
stress test modeling decisions described in the comprehensive
documentation of the supervisory stress test models that the Board is
publishing in conjunction with this proposal.
---------------------------------------------------------------------------
\26\ See, e.g., Board, 2018 Supervisory Stress Test Results
(Jun. 2018), <a href="https://www.federalreserve.gov/publications/files/2018-dfast-methodology-results-20180621.pdf">https://www.federalreserve.gov/publications/files/2018-dfast-methodology-results-20180621.pdf</a>.
\27\ See 84 FR 6664 (Feb. 28, 2019).
\28\ See 84 FR 6784 (Feb. 28, 2019).
\29\ See 12 CFR 252, Appendix B.
---------------------------------------------------------------------------
The Enhanced Model Disclosure supplemented prior public
descriptions of the stress test models by providing some information
about their structure and by including a list of key variables that
influence the results of each model.\30\
---------------------------------------------------------------------------
\30\ See, e.g., Board, 2025 Supervisory Stress Test Methodology
(Jun. 2025), <a href="https://www.federalreserve.gov/publications/files/2025-june-supervisory-stress-test-methodology.pdf">https://www.federalreserve.gov/publications/files/2025-june-supervisory-stress-test-methodology.pdf</a>.
---------------------------------------------------------------------------
C. Supervisory Stress Test Modeling Framework
The Board's stress test models take macroeconomic variables from
the Board's severely adverse scenario and data from firms as inputs to
produce each firm's projected capital ratios over a nine-quarter
projection horizon (projection horizon). The minimum projected common
equity tier 1 capital ratio is used to inform each firm's stress
capital buffer requirement, which becomes part of a firm's capital
conservation buffer.
The stress test models are intended to capture how a firm's
regulatory capital would be affected by the macroeconomic and financial
conditions described in the stress test scenarios, given the
characteristics of the firm's business model and balance sheet
composition. The Board uses a variety of statistical modeling
techniques to produce the stress test results, including multivariate
regression, which uses relationships in historical data to produce
projections of a variable (such as a loss given default). These models
are represented by a set of formulas and coefficients that produce the
projections.
The Board estimates the effect of the severely adverse scenario on
the regulatory capital ratios of firms by projecting revenues,
expenses, and losses for each firm over the projection horizon. The
projection horizon spans nine quarters to ensure that the firms can
continue to provide credit and serve as financial intermediaries
despite several quarters of adverse economic conditions, as well as to
promote the forward-looking nature of capital planning by firms.
Projected net income, adjusted for the effect of taxes, is combined
with assumptions regarding capital actions and other changes to
regulatory capital to produce post-stress capital ratios. The Board's
approach to modeling supervisory stress test results, including the
calculation of post-stress capital ratios, is generally in alignment
with U.S. GAAP and the regulatory capital framework.\31\ However, the
stress test models may deviate from U.S. GAAP and the regulatory
capital framework, as circumstances warrant.
---------------------------------------------------------------------------
\31\ See generally 12 CFR part 217.
---------------------------------------------------------------------------
The Board established the Stress Testing Policy Statement modeling
principles to ensure that the models are well suited for their purpose
in the regulatory framework. In some cases, the Board's adherence to
the principles limits modeling choices and results in certain common
limitations across similarly constructed component models. For
instance, consistent with the principles of independence, consistency
and comparability, and simplicity, models are not designed to capture
all firm-specific nuances, future strategic initiatives, or planned
capital actions. Additionally, models may be limited by their reliance
on historic relationships and by the nature of the data captured in
firms' regulatory reports. Detailed assumptions and limitations for the
models are discussed in the comprehensive documentation, which is
available at <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>.
Under the Stress Testing Policy Statement, the Board's projections
also assume that a firm's balance sheet remains unchanged throughout
the projection horizon.\32\ This assumption seeks to help ensure that a
firm cannot ``shrink to health'' and that it remains sufficiently
capitalized to accommodate credit demand in a severe downturn.
---------------------------------------------------------------------------
\32\ See 12 CFR 252, Appendix B, section 2.7.
---------------------------------------------------------------------------
D. Stress Test Models
The Board's stress test models comprise twenty-one component models
that, when aggregated, produce projected regulatory capital ratios for
each firm (see Table 1 below). The models can be grouped into four
categories: credit risk, market risk, net revenue, and aggregation.
These models enable the Board to estimate the effect of the scenarios
on the regulatory capital ratios of firms participating in the stress
test by projecting net income and other components of regulatory
capital for each firm over a nine-quarter projection horizon.
Credit risk models capture losses associated with retail and
wholesale loans that are held at amortized cost. Market risk models
capture losses associated with trading and counterparty exposures,
securities, and other assets held at fair value. Net revenue models
capture income and expenses, including those related to operational
risk, earned or incurred by a firm. Positive pre-provision net revenue
typically offsets credit and market risk losses in the calculation of a
firm's pre-tax net income. Aggregation models calculate a firm's pre-
tax net income, which is then adjusted for other elements such as taxes
and regulatory capital deductions to arrive at the projection of a
firm's regulatory capital, which is used to calculate a firm's
projected capital ratios. Additional detail about these component
models is included in the comprehensive model documentation available
at <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2027.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2027.htm</a>.\33\
---------------------------------------------------------------------------
\33\ See Board, 2025 Supervisory Stress Test Methodology (Jun.
2025), <a href="https://www.federalreserve.gov/publications/files/2025-june-supervisory-stress-test-methodology.pdf">https://www.federalreserve.gov/publications/files/2025-june-supervisory-stress-test-methodology.pdf</a>; Board, Dodd-Frank Act
Stress Tests 2026 (Jun. 2026), <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>.
---------------------------------------------------------------------------
BILLING CODE 6210-01-P
[[Page 62874]]
[GRAPHIC] [TIFF OMITTED] TR02OC26.021
[[Page 62875]]
[GRAPHIC] [TIFF OMITTED] TR02OC26.022
BILLING CODE 6210-01-C
E. Overview and Purpose of the Proposal
---------------------------------------------------------------------------
\34\ The Trading Issuer Default Loss Model, Trading Profit and
Loss Model, Credit Valuation Adjustment Model, and Largest
Counterparty Default Model apply only to a subset of firms. See
Section II.B of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
This section summarizes the contents and purpose of the proposal.
1. Overview of the Proposal
The Board proposed to codify an enhanced disclosure process that
would build on the previous efforts that the Board has made to increase
the transparency and public accountability of the supervisory stress
test. Under this enhanced disclosure process, the Board would annually
publish comprehensive model documentation on the stress test models,
invite public comment on any material changes that the Board seeks to
make to those models, and annually publish the stress test scenarios
for comment. The Board would have also committed to responding to
substantive public comments on any material model changes before
implementing such changes. The proposal would have revised the Stress
Testing Policy Statement to align with this enhanced disclosure
process, as well as to amend the Board's general policy related to
disclosing additional information directly to a firm about that firm's
supervisory stress test results. To accommodate the annual comment
process on the scenarios, the proposal would have also shifted the
jump-off date of the supervisory and company-run stress tests from
December 31 to September 30.
Additionally, the proposal would have amended the Scenario Design
Policy Statement in several ways. The Board would have included in the
Scenario Design Policy Statement detailed descriptions of additional
guides that are used to inform the Board's choice of the values of the
scenario variables along their scenario paths. The guides were designed
to balance the competing objectives of predictability and transparency
with the severity and relevance of the macroeconomic and financial
market scenarios. Most of the proposed guides also incorporated
features similar to the range of options in the existing unemployment
guide or the automatic adjustment of the house price path to current
housing market conditions in the existing house price guide. This
approach would have allowed the Board to continue to adjust the
severity of those variables as necessary to avoid inducing greater
procyclicality in the financial system and macroeconomy.
Similarly, the Board proposed to incorporate additional information
into the Scenario Design Policy Statement about the framework used to
create the global market shock component of the severely adverse
scenario. This information included, but was not limited to, details on
the logic underlying the severity of the shocks and a description of
the processes used to generate the shock values. The Board also
proposed to update the global market shock methodology to simplify the
scenario and better align certain elements of the global market shock
with the nature of an ``instantaneous'' shock. The proposal would have
also revised the stress test rules to improve the risk capture of the
supervisory stress test by widening the as-of date window for the
global market shock.
The proposal also would have made changes to the FR Y-14A/Q/M
reports to remove items and documentation requirements that would no
longer be needed to conduct the supervisory stress test, as well as to
collect additional data to improve risk capture.
The Board also published comprehensive documentation on the stress
test models on the Board's website, which is available at <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>. This
documentation contains information on the models that produce the
results of the supervisory stress test, including the equations,
variables, and coefficients used in each model (where applicable);
assumptions and limitations of each model; rationales for modeling
decisions; and discussions of alternative models. Section VI.A of this
SUPPLEMENTARY INFORMATION summarizes changes to the models, relative to
the 2025 stress test, that the Board plans to implement in the 2027
stress test cycle; Section VI.B of this SUPPLEMENTARY INFORMATION
contains an analysis of the potential effects of these proposed model
changes. Detailed documentation on these changes is also provided on
the Board's website, at <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2027.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2027.htm</a>.
[[Page 62876]]
2. Purpose of the Proposal
The purpose of this proposal was to provide the public with more
information about the stress test models and scenarios and to help
ensure that the public has an opportunity to comment on the models and
scenarios. While the Board has increased the transparency of the stress
test models over time, disclosing additional information about the
models and their underlying methodologies will further increase
transparency and improve public accountability. At the same time, these
changes were intended to improve the risk capture of the supervisory
stress test and ensure the test's ability to capture changes in risks
in the financial industry over time.
As described in the proposal, publishing detailed descriptions of
the stress test models for comment, as well as committing to future
enhanced disclosures, has benefits. First, the increase in transparency
would increase public accountability and instill confidence in the
fairness of the supervisory stress tests. Second, the disclosure
process would create a new mechanism for obtaining feedback from the
public, including academics, financial analysts, and firms, on the
design and specifications of the models, which should lead to model
improvements. Third, a firm would have a better sense of how its risk
profile would factor into its stress test results and stress capital
buffer requirement, which would reduce the likelihood of unanticipated
stress test results and allow for better capital and business planning
by firms. Finally, the public disclosure of additional information
about supervisory stress tests should strengthen market discipline,
because investors, counterparties, and rating agencies would be able to
better assess a firm's risk profile.\35\ The costs and benefits of
publishing descriptions of the models and committing to future enhanced
disclosures were described in Section X of the Supplementary
Information in the proposal.
---------------------------------------------------------------------------
\35\ See, e.g., N. Gambetta, M.A. Garc[iacute]a-Benau, and A.
Zorio-Grima, Stress test impact and bank risk profile: Evidence from
macro stress testing in Europe, International Review of Economics &
Finance 61 (2019), 347-54; I. Goldstein and Y. Leitner, ``Stress
test disclosure: theory, practice, and new perspectives,'' Handbook
of Financial Stress Testing (2022), 208-223.
---------------------------------------------------------------------------
With respect to the proposed amendments to the Scenario Design
Policy Statement, the proposal also built on the contents of the
current Scenario Design Policy Statement and would have amended it to
provide additional transparency, public accountability, and
predictability in the variable paths. The changes would have supported
the Board in developing scenarios, inviting comment on those scenarios,
incorporating input from commenters, and maintaining the current
schedule for release of the final scenarios. Despite the increased
predictability in the scenarios, the proposed framework would have
remained flexible enough to suitably assess whether firms could
maintain an adequate amount of loss-absorbing capital to stay above
minimum regulatory requirements and continue financial intermediation
during periods of stress. Further, the proposed framework would have
promoted the scenario design principle of avoiding adding
procyclicality to the financial system. In practice, the scenarios
resulting from the revised framework were expected to remain consistent
with the current Scenario Design Policy Statement and should not have
resulted, on average over a typical business cycle, in materially
different scenarios than would have been designed previously.
Taken together, these changes were intended to improve
transparency, public accountability, and predictability of the
supervisory scenarios, while ensuring the supervisory stress test's
ability to capture changes in risks in the financial industry over
time.
F. General Summary of Comments
The Board received 30 comments on the proposal from banking
organizations, trade associations, public interest groups, and private
individuals.\36\ Most commenters were supportive of the proposal's
objective of enhancing the transparency and public accountability the
stress test models and scenarios while also ensuring the supervisory
stress test's ability to capture changes in the risks in the financial
industry over time. However, some commenters objected to the increased
transparency of the stress test, stating that it would undermine the
effectiveness and dynamism of the test. Commenters provided a range of
views on the proposed changes to the stress test rules, policy
statements, and the scenarios and models.
---------------------------------------------------------------------------
\36\ See Enhanced Transparency and Public Accountability of the
Supervisory Stress Test Models and Scenarios; Modifications to the
Capital Planning and Stress Capital Buffer Requirement Rule,
Enhanced Prudential Standards Rule, and Regulation LL [R-1873],
<a href="https://www.federalreserve.gov/apps/proposals/FR-2025-0063-01/details">https://www.federalreserve.gov/apps/proposals/FR-2025-0063-01/details</a>.
---------------------------------------------------------------------------
With respect to the proposed changes to the Board's stress testing
rules, including the annual calendar of stress test disclosures and
results and capital planning submissions, the Board received comments
that supported scenario disclosure only after the stress test jump-off
date. However, some commenters suggested an alternative schedule that
would accommodate the public comment period on scenarios and material
model changes while retaining the December 31 jump-off date. One
commenter recommended the inclusion of additional scenarios with more
severe assumptions and also recommended that the Board introduce a
qualitative objection process. Another commenter recommended that the
Board adopt quantitative parameters that govern scenario and shock
design. Commenters also provided input on the applicability of the
global market shock component and the dividend add-on to different
categories of firms. Some commenters also recommended that all model
changes be published for public input, not just material model changes.
Commenters provided general support and input on the proposed
changes to the Stress Test Policy Statement and Scenario Design Policy
Statement. Commenters also provided input on the proposed modifications
to the FR Y-14A/Q/M reports, while suggesting additional changes to the
reporting forms that would enhance the granularity of certain stress
test models or reduce regulatory burden.
[[Page 62877]]
With respect to the proposed models for the 2026 stress test,
commenters provided a mix of comments that expressed general support
for the proposed models, as well as suggestions for additional changes,
including many conceptual and technical adjustments. In general, many
commenters recommended increasing the complexity and granularity of the
models to better reflect differences across the firms subject to the
stress test. For instance, some commenters suggested significant
changes to the pre-provision net revenue (PPNR) models related to
noninterest income and noninterest expense. Several of these commenters
also recommended the Board adjust its modeling approach to better
reflect risk mitigants on firms' balance sheets in stress test results,
such as through broader consideration of hedging instruments in the
stress test models. Several commenters also suggested implementation of
additional stress test components that would capture risks related to
digital assets or climate events.
Finally, commenters also provided input on other proposals and
their interaction with this one, such as the Board's Volatility
Proposal and the Board's recent capital proposals.\37\ To the extent
those comments were relevant to this proposal, they are addressed in
the Supplementary Information below.
---------------------------------------------------------------------------
\37\ 91 FR 14908 (Mar. 27, 2026); 91 FR 14952 (Mar. 27, 2026);
and 91 FR 15332 (Mar. 27, 2026) (together, the ``2026 Capital
Proposals'').
---------------------------------------------------------------------------
G. Overview of the Final Rule and Final Policy Statements
The Board is finalizing the rule and the policy statements largely
as proposed, but with several modifications. These revisions would
further improve the transparency and public accountability of the
stress test, while maintaining the dynamism and risk sensitivity of the
stress test framework.
1. Key Changes in Response to Comments
In considering the comments provided by the public and the purposes
of the proposal, the Board determined to make several key changes to
the final rule relative to the proposal.
Stress Testing Calendar
The Board proposed to revise several dates in the annual stress
test cycle and sought feedback on revising other dates to comport with
any final changes to cycle deadlines. For the final rule, the Board
determined to revise several dates that are set out in the stress test
rule and policy statements. The Board proposed to move the annual jump-
off date to September 30 from December 31 to accommodate a public input
period without requiring any accompanying changes to the rest of the
stress test calendar. However, the Board is finalizing this rule
without changing the current stress test jump-off date given concerns
from commenters about operational burden and data integrity related to
existing year-end processes. Retaining the December 31 jump-off date
requires several adjustments to the annual cycle to enable public input
on stress test scenarios, as described below.
With respect to model disclosure, the Board did not propose a
single date by which the Board would publish material model changes for
comment. However, the Board is finalizing August 31 of the year prior
to the stress test as the date by which the Board will publish any such
proposed changes for public input. This date will ensure that the Board
can meaningfully engage with public comments before implementing
material model changes.
With respect to scenario disclosure, the Board proposed to disclose
scenarios for public input on October 15 of the year prior to the
stress test, but it will adopt January 10 of the year of the stress
test in this final rule so that the scenarios are proposed after the
jump-off date. Disclosing proposed scenarios after the jump-off date
prevents firms from adjusting their exposures based on the published
scenario information. In addition, to ensure that a firm subject to
Category IV standards must decide whether to participate in the stress
test in an odd-numbered year prior to the disclosure of the proposed
scenarios, the final rule would move the date by which these firms must
make that determination from January 15 to January 5.\38\ Next, the
Board proposed a public input period of at least 30 days for proposed
scenarios, and it has retained this proposed public input period in
this final rule to ensure the public has time to consider the proposed
scenarios and provide input, as appropriate. Relatedly, the Board
proposed to retain the February 15 date to publish final scenarios, but
it is revising this date to February 28 to ensure that the Board has
sufficient time to consider public input prior to finalizing the
scenarios.
---------------------------------------------------------------------------
\38\ Category IV firms generally are not required to participate
in the supervisory stress test during odd-numbered years. 12 CFR
252.44(d)(1). However, Category IV firms may elect to participate in
the stress test in a year ending in an odd number by providing
notice to the Board. 12 CFR 252.44(d)(2)(ii).
---------------------------------------------------------------------------
The Board also did not propose changes to the capital plan
submission deadline or to the date by which firms subject to Category
I-III standards must conduct company-run stress tests, but it is
adopting April 30 as the deadline for both of these requirements under
the final rule to ensure firms have sufficient time to submit capital
plans and conduct company-run stress tests following the publication of
the final scenarios.
The Board did not propose changes to the 15 calendar day timeframe
in which a firm can request reconsideration of its stress capital
buffer requirement. However, to provide firms with more time to
consider whether to request reconsideration, the Board is revising this
timeframe to 15 business days. The Board also did not propose revising
the date by which it must disclose final stress capital buffer
requirements, which is currently August 31. However, the final rule
moves this date to September 30 to better ensure that the Board can
adequately assess reconsideration requests before disclosing final
stress capital buffer requirements.
Finally, as part of a separate final rule associated with the
Volatility Proposal, the Board is moving the effective date of firms'
stress capital buffer requirement from October 1 to January 1 to allow
firms more time to comply with their new requirement. While not
discussed in this final rule, this effective date change is included in
Table 2 for completeness.
BILLING CODE 6210-01-P
[[Page 62878]]
[GRAPHIC] [TIFF OMITTED] TR02OC26.023
BILLING CODE 6210-01-C
Material Model Changes
---------------------------------------------------------------------------
\39\ Previously, the Board's practice was to publish all
material model changes in the annual model methodology document and
phase in material model changes over two years. See, e.g., Board,
2025 Supervisory Stress Test Methodology (Jun. 2025), <a href="https://www.federalreserve.gov/publications/files/2025-june-supervisory-stress-test-methodology.pdf">https://www.federalreserve.gov/publications/files/2025-june-supervisory-stress-test-methodology.pdf</a>. See also 12 CFR 252, Appendix B,
section 2.3.
\40\ Submission of FR Y-14A data needed for the Board to
calculate stress test losses related to the global market shock
component would also continue to be due on this date.
\41\ Submission of FR Y-14A data not needed to calculate stress
test losses related to the global market shock component would also
be due on this date.
---------------------------------------------------------------------------
The Board also proposed to introduce a material model change
definition, which would have required the Board to publish for public
input prior to implementation certain model changes that could have, in
the Board's estimation, an impact on the post-stress common equity tier
1 capital ratio of any firm, or on the average post-stress common
equity tier 1 capital ratios of all firms required to participate in
the upcoming stress test cycle, based on the prior year's severely
adverse scenario and prior year's input data, equal to (i) a change of
20 basis points or more in the projected common equity tier 1 ratio of
any firm participating in the upcoming stress test cycle; or (ii) a
change of 10 basis points or more in the average of the absolute value
of each firm's change in projected common equity tier 1 ratio. In the
final rule, the Board is revising this proposed definition so that the
criteria to determine whether a model change would be published for
public input
[[Page 62879]]
prior to implementation is based on the post-stress common equity tier
1 capital ratio of each of the firms subject to the supervisory stress
test, as described below in Section II.C of this Supplementary
Information. As a result, the Board will consider a model change's
impact on all firms that have at least $100 billion in total
consolidated assets, and which have completed transition arrangements
and continue to be subject to the stress test, regardless of whether
those firms are actually required to participate in the upcoming stress
test cycle. More specifically, this revision would ensure that the
potential capital impact on all such firms is considered when
determining whether a model change would be material.
Other Changes
Additionally, the Board is finalizing the proposed changes to the
FR Y-14A/Q/M forms with some additional changes. To reduce reporting
burden, the final rule would remove items, schedules, and supporting
documentation requirements that are no longer needed to conduct the
supervisory stress test, largely as proposed. The final rule would also
add a limited number of items to enable implementation of the models
for the 2027 stress test, as well as to allow for potential future
model enhancements.
Finally, the Board is also making additional changes to the global
market shock component of the severely adverse scenario, which is set
out in the final rule for company-run stress tests and the Scenario
Design Policy Statement. These changes concern the date range in which
the global market shock as-of date must occur and the number of global
market shock scenarios for a given stress test, both of which improve
the risk capture of the global market shock component. The Board
proposed to revise the date selection range of the GMS as-of date to be
a full year, between October 1 of two years prior to a given stress
test cycle to October 1 of the year prior to a given stress test cycle.
The final rule adopts a date selection range of nine months, between
April 1 and December 31 of the year prior to the stress test. This
nine-month range would allow the Board to consider a wider array of
market conditions for the as-of date of the global market shock
component than is possible using the current range of five months.
Additionally, the revised Scenario Design Policy Statement will explain
that the Board expects to establish two different GMS scenarios on a
single date for a given annual stress test, which would differ from the
current approach of having one GMS scenario on a single date.
The Board is also finalizing the Board's Stress Testing Policy
Statement and Scenario Design Policy Statement largely as proposed, but
with several modifications. With respect to the Stress Testing Policy
Statement, the Board is amending this policy statement to affirm its
expectation to continue providing the enhanced firm and public
disclosure processes described in this notice. With respect to the
Scenario Design Policy Statement, the Board is finalizing the
proposal's substantive and technical changes to the policy statement
that provide additional transparency into the Board's scenario design
process, with several technical adjustments relative to the proposal.
2. Purpose of the Final Rule and the Final Policy Statements
As stated above, the purpose of the proposal was generally to
increase transparency and public accountability while improving the
risk capture of the supervisory stress test and ensuring the test's
ability to capture changes in risks in the financial industry over
time.
The Board received a range of comments on the purposes of the
proposed rule, which the Board considered in evaluating policy options
for this final rulemaking.
Many commenters supported the Board's actions to increase the
transparency of the stress test, stating that improved transparency
would support the predictability of the stress test. Increased
predictability would improve capital allocation and planning at firms
subject to the stress test. One commenter also stated that predictable
stress tests would improve market discipline, as investors,
counterparties, and analysts would be better able to understand stress
test results, while also improving the public's confidence in the
stress test.
Commenters that supported the purposes of the proposal specifically
highlighted the proposed public input processes for stress test
scenarios and models. Commenters suggested that the public input
process would improve model quality by enabling public input in
identifying weaknesses or challenging assumptions in the models. One
commenter stated that the increased transparency would lower risk in
the financial system by improving the risk capture of the stress test
models.
Commenters also suggested that the proposal would, if finalized,
reduce the volatility of stress capital buffer requirements. According
to these commenters, reducing the volatility of the stress test would
support effective capital planning and the deployment of capital and
liquidity into the broader economy, which would improve the
availability and cost of credit for businesses and households because
firms would be able to better anticipate volatility in stress capital
buffer requirements.
Other commenters opposed the proposal and its purpose to increase
the transparency of the stress test. Some commenters stated that the
proposal would increase the predictability of the stress test, which
would reduce the dynamism of the stress test and limit its ability to
capture salient and unseen or under-appreciated risks by making the
annual test more repetitive. These commenters generally expressed
concern that model and scenario disclosure would enable or incentivize
firms to limit their stress test losses by adjusting their balance
sheets. These commenters argued that firms would be able to optimize
their balance sheets for the stress test, which would enable them to
lower their stress capital buffer requirements without necessarily
reducing the riskiness of their portfolios. Some commenters expressed
concern that model disclosure would lead to ``model monoculture,''
whereby firms adjust their internal models to adopt the Board's stress
test models and miss specific risks that would be relevant to a given
firm or set of firms. However, another commenter argued that concerns
about ``model monoculture'' and balance sheet optimization are
misplaced, and that supervisory attention and firm incentives eliminate
any realistic possibility of balance sheet optimization based on the
disclosed models.
Commenters also provided feedback on the Board's retained
discretion in model and scenario design, and they suggested that the
Board take steps to prevent model arbitrage and balance sheet
optimization, and to continuously evaluate the impacts of the
transparency introduced by the proposal, including through publication
of model and scenario specifications prior to the stress test jump-off
date. One commenter offered suggestions for adjusting the global market
shock component so that it incorporates two shock scenarios in order to
mitigate these risks. Commenters also suggested that the Board provide
additional explanation of how it would balance the transparency of the
proposal with the integrity of the stress test, or how the Board would
exercise its discretion with respect to certain modeling decisions,
such as modeling changes that would occur after the publication of the
model
[[Page 62880]]
documentation. Some commenters also suggested that the Board retain the
confidentiality of some information related to the models and scenario
specifications and rationales, or that the Board publish this
information on a delayed basis, to mitigate the risk that firms tailor
portfolios to the stress test models rather than underlying risks.
After considering input from the public, the Board remains
committed to the proposal's goals of increasing transparency and public
accountability while improving the risk capture of the supervisory
stress test and supporting the broader goals of the stress test
program. The Board expects that, under the final rule, the stress test
models and scenarios will remain robust and effectively able to capture
risks to the financial system. As described in the proposal, seeking
public input on the scenarios and models has several benefits,
including increased public accountability and confidence in the
fairness of the stress test, improved scenarios and models that
incorporate public feedback, improved capital planning due to the
reduced likelihood of unanticipated stress test results, and stronger
market discipline, as the public will be able to better assess a firm's
risk profile. Together with enhancements to the Board's models and
scenario design framework, and the Volatility final rule, the Board
expects this final action will improve the transparency and public
accountability of the stress test, while enabling the Board to continue
to meet the goals of the stress test.
The Board's response to comments on specific aspects of the
proposal, as well as its rationale for the final rule and policy
statements, are described below.
H. Interactions With Other Proposals
The Board has published other policy actions for public comment and
received input on those proposals, including the Volatility Proposal
and the 2026 Capital Proposals. Some commenters on those proposals also
provided comments on the enhanced transparency and public
accountability of the stress test proposal, including with respect to
interactions between these proposals. For example, some commenters
suggested that the Board should consider overlaps between the risks
captured by the Board's stress test models and the 2026 Capital
Proposals, and that the Board should develop an implementation timeline
that considers effective dates of each proposal. The Board addressed
comments on the Volatility Proposal in the final action described in a
separate Federal Register notice. The Board has addressed comments on
this enhanced transparency and public accountability of the stress test
proposal in this notice, and will address comments on the 2026 Capital
Proposals in any final action on those proposals.
II. Enhanced Disclosure Process
Under the proposal, the Board would have codified an enhanced
disclosure process. As part of this process, the Board would annually
publish comprehensive documentation on the stress test models, invite
public input on any material changes that the Board seeks to make to
those models, and annually publish the stress test scenarios for
comment. The Board is finalizing this aspect of the proposal, with
several enhancements and adjustments.
A. Annual Disclosure of Models
Under the proposal, the Board would have annually published the
models used to conduct the supervisory stress test. The form of this
disclosure would be similar to the comprehensive documentation on the
stress test models that was published with the proposal at <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>. The
Board would have been required to disclose its models by May 15 of the
year in which the stress test is performed, and the models described in
the documentation would be used to produce the stress test results
disclosed by the Board by June 30 of that year. In addition, the Board
would seek public input, and respond to such substantive public input,
on any material changes to the models before implementing those changes
in a stress test. Material model changes are discussed in more detail
in Section II.C of this Supplementary Information. To implement this
enhanced disclosure process, the Board proposed to revise Regulations
YY and LL, as well as the Stress Testing Policy Statement.
The Board received many comments on the proposal to annually
disclose the models used in the stress test as well as the date of
disclosure. Commenters provided a range of feedback on the Board's
approach to model disclosure. As described above in Section I.G of this
Supplementary Information, many commenters supported the Board's
actions to increase the transparency of the stress test, stating that
improved transparency would support the predictability of the stress
test for firms subject to the stress test, which would improve capital
allocation and planning.
Conversely, some commenters opposed the enhanced model disclosures
described in the proposal, stating that these disclosures would
increase the predictability of the stress test, reduce the dynamism of
the stress test, and limit its ability to capture salient and unseen or
under-appreciated risks by making the annual test more repetitive.
These commenters expressed concerns that these disclosures would enable
firms to adjust their balance sheets to reduce their stress capital
buffer requirements without necessarily reducing actual risks. These
commenters also expressed concern that model disclosure would lead to
``model monoculture,'' whereby firms adjust their internal models to
adopt the Board's stress test models and miss specific risks that would
be relevant to a given firm or set of firms. One of these commenters
further stated that while disclosure of the conceptual bases for the
models would be appropriate, certain operational details may need to be
held as confidential to avoid creating incentives for firms to tailor
their exposures to the stress test models rather than the firm's
assessment of risk. Another commenter recommended that the Board also
disclose other model details, such as validation information, to better
facilitate public comment. One commenter suggested that the Board align
its disclosure practices with international peers and establish a
review mechanism where independent experts would periodically evaluate
the Board's stress test methodologies.
With respect to the May 15 model disclosure date, one commenter
stated that the Board should publish the final model documentation
prior to the capital plan submission date, which was set as April 5 of
each year under the current stress testing rules.\42\ This commenter
stated that it would be important for firms to understand the models
used in the stress test prior to submitting their capital plans, and
that the Board's approach would not comply with the Board's legal
obligations under the Administrative Procedure Act and the Due Process
Clause of the U.S. Constitution.
---------------------------------------------------------------------------
\42\ An adjustment to this aspect of the Board's stress testing
rules is described in Section II.E of this Supplementary
Information.
---------------------------------------------------------------------------
One commenter stated that establishing a set timeline for model
disclosure could leave models outdated as financial markets and risk
profiles can change rapidly. This commenter suggested that the Board
adopt a mechanism for expedited procedures for urgent model updates
that respond to threats to financial stability. This commenter also
expressed concern that the annual stress test cycle would be compressed
further by incorporating
[[Page 62881]]
public input on the models, which could limit the Board's ability to
incorporate feedback without disrupting the annual stress test cycle.
The Board is adopting this aspect of the proposal, with one change
to enable disclosure of necessary additional adjustments to models that
may occur after May 15.
As described above in Section I.G of this Supplementary
Information, the Board is committed to enhancing the transparency and
public accountability of the stress test, including through disclosure
of the models the Board uses in the annual stress test. The Board has
considered the risks identified by commenters in disclosing the Board's
stress test models and has implemented several mitigating measures in
this final action, as described throughout this Supplementary
Information, and also retained certain mitigating measures, such as the
Model Validation Council, which is a council of external academic
experts that provides independent advice on the Board's process to
assess models used in the supervisory stress test and is described in
the Stress Testing Policy Statement.\43\
---------------------------------------------------------------------------
\43\ 12 CFR 252, Appendix B, section 3.
---------------------------------------------------------------------------
The Board considered comments about milestones in the broader
stress test cycle, discussed throughout this Supplementary Information,
and determined that a May 15 disclosure date would best balance the
public's interest in timely disclosure with the operational demands of
the stress test cycle, particularly in implementing an additional
public input process into the annual cycle. Disclosure of stress test
models before May 15 would not allow the Board to adequately develop,
propose, and evaluate public input on changes to the stress test models
for use in that year's stress test, or to update model parameters based
on recent data submissions. Further, material model changes will be
disclosed for public input well in advance of May 15 each year,
providing firms and the public with a reasonable sense of the impacts
to results of any such adjustments to the Board's models.
Additionally, in a change from the proposal and in consideration of
comments received, the Board is adopting a process by which the Board
could make non-material, technical changes after the final models have
been disclosed, including after May 15. Such adjustments would be
limited to fixing clear errors, making technical changes, and
addressing circumstances where the Board determines that a change in
the models is necessary to accurately determine firms' stress test
losses. These types of post May 15 changes and disclosures would ensure
that the Board can correct identified errors in the stress test models
or documentation and would ensure the effective administration of the
stress test before stress test results are finalized. These changes
would be published so that the public could understand the changes and
firms could understand their results. In this situation, the Board
would publish a description of the model updates no later than June 30.
Additionally, the Board considered whether it could be appropriate
to retain the confidentiality of certain aspects of the Board's models
at this time or in the future. The Board has provided detailed
descriptions of its stress test models and has not determined to
implement a mechanism that would establish that certain aspects of the
Board's models would remain confidential. However, the Board has not
disclosed some information related to the models, such as the firm-
specific fixed effects and third party vendor information. The Board
does not view publishing this information as necessary to meet the
goals of this final rule. However, the Board is committed to the
transparency of the stress test, and will continue to consider any
appropriate disclosure enhancements in the future.
B. Model Changes
The proposed rule would have defined a ``model change'' to mean
``the introduction of a new model or a conceptual change to an existing
model.'' The Board's proposed definition of ``model change'' is an
important component of the Board's proposed definition of ``material
model changes,'' which is discussed in greater detail in Section II.C.
of this Supplementary Information. As explained in the proposal, the
Board would publish ``material model changes'' for public input prior
to implementing those changes in the supervisory stress test. To
balance the benefit of public feedback with the operational and
resource costs of seeking such feedback and to allow the Board to
ensure reasonable results, the Board would not formally invite public
comment on model adjustments or updates that are not new models or
conceptual changes to existing models before implementing them in the
stress test; however, the Board would welcome public feedback on these
and all other aspects of the stress test models once they are
published.
Some commenters suggested that all changes to the models should be
published for comment before they are implemented, with one commenter
suggesting they be published by August 31 for a 60-day comment period.
One commenter said that the Board's definition of ``model change'' is
unduly narrow and argued that the Board should revise the definition to
capture any change to the modeling process that affects results,
including changes to methodology, removal of firm data, re-estimation
of model parameters, or changes to the scope of a model's use.\44\ As
described below in Section II.C of this Supplementary Information, the
Board also considered comments that stated the Board's approach would
violate the Administrative Procedure Act and the Due Process Clause of
the U.S. Constitution.
---------------------------------------------------------------------------
\44\ Re-estimation comprises updates to model parameters based
on consideration of different input data (e.g., incorporating the
most recent year's data as a model input, or incorporating data from
new stress test entrants or from mergers).
---------------------------------------------------------------------------
The Board is finalizing this aspect of the proposal as proposed,
with technical adjustments to the regulation text definition of ``model
change'' to incorporate descriptive language which had been included in
the proposal's preamble.
As explained in the proposal, a ``new model'' means a model that
fully replaces one of the twenty-one component models described in this
Section of this Supplementary Information, or is added to the modeling
suite (e.g., a 22nd component model). Conceptual changes to existing
models would include changes to model assumptions, incorporation of a
new statistical technique, or the addition or deletion of any model
components or sub-components that currently inform a firm's stress
capital buffer requirement.
Model changes would not include changes resulting from updates or
adjustments to input data, such as firm data, third-party vendor data,
and scenario data, including any re-estimation based on this data, as
well as changes related to accounting definitions or to the mechanical
implementation of federal, state, or local laws that are directly
embedded in a stress test model (e.g., the federal statutory tax rate).
In this final rule, the Board is including this detail regarding the
Board's definition of ``model change'' directly in the regulation text,
in order to promote the clarity and predictability of this definition.
As is current practice, the Board would generally continue to implement
changes in accounting definitions or regulatory capital rules and model
parameter re-estimation based on newly available data with immediate
effect. These types of adjustments would not be considered model
changes because
[[Page 62882]]
they do not substantively change the form of the stress test models as
described in the documentation. For example, the Board re-estimates
many of its models with updated data each year when it runs the
supervisory stress test. This re-estimation may result in changes to
the statistical coefficients produced by some of the models, even
though the Board has made no conceptual changes to the models. Under
the proposed definition of model change, such re-estimation would not
be viewed as a model change because the resulting changes stem solely
from updated data and not from a conceptual change to the models.
Similarly, changes to the estimation sample periods would not be
considered model changes. Finally, the definition of model changes
would exclude model adjustments made in response to a reconsideration
request granted by the Board.
The Board considered the range of comments on this aspect of the
proposal, including those that suggested that all changes to the
Board's stress test models should be published for comment, as well as
other comments that suggested that none of the models should be put out
for comment, or only a portion of the models or aspects of the models.
The Board is committed to enhancing the transparency and public
accountability of the stress test, and the Board is balancing those
considerations with practical operational challenges of administering
the annual stress test. Under the approach finalized here, the public
is able to provide input on the most important changes to the models
before they are implemented, while other necessary and appropriate
adjustments to the models will continue to occur without disrupting or
disincentivizing model improvements within and across the annual stress
test cycles.
As explained in the proposal, the Board will annually disclose
adjustments to the models that are not ``model changes'' and will
welcome public feedback, whether within a public input period on
proposed material model changes or informally, on these adjustments and
all other aspects of the stress test models as they are published.
Notably, firms will be able to review these changes prior to the
deadline to submit requests for reconsideration of their stress capital
buffer requirements. In considering these comments, the Board
determined that adopting the proposed definition of ``model change,''
with additional clarification, as part of the regulation text rather
than solely in this Supplementary Information, appropriately balances
the public's interest in transparency with the goals and operational
challenges of the stress test program.
The Board also considered comments suggesting that it should
disclose adjustments to models that do not meet the definition of model
changes and provide a measurement of their expected impact. The Board
is not adopting a formal template or criteria for disclosing these
adjustments. Rather, the Board expects to continue to use the existing
format for identifying adjustments to the models, which best balances
the public's interest in transparency with the practical limitations of
an annual stress test, the complexity of the Board's stress test
models, and the potential to refine disclosures over time. Consistent
with the disclosure methods described in this Section and Section II.A
of this Supplementary Information to provide transparency on
adjustments to the models year to year, these adjustments will be
included in applicable model documentation published by May 15.\45\
---------------------------------------------------------------------------
\45\ As noted in Section II.A of this Supplementary Information,
the Board could correct errors and make technical changes to the
models, as well as address circumstances necessary to accurately
determine firms' stress test losses, potentially after May 15. In
such cases, documentation of the updates would be published no later
than the date of results disclosure.
---------------------------------------------------------------------------
Finally, the Board also considered comments that stated the Board's
approach would violate the Administrative Procedure Act and the Due
Process Clause of the U.S. Constitution. These comments are discussed
below in Section II.C of this Supplementary Information.
C. Material Model Changes
The proposal would have established a definition of ``material
model change,'' so that such material model changes would be published
for public input prior to implementation in the annual stress test.
This approach would balance the public's interest in commenting on the
most important changes to the Board's stress test modeling framework
with the importance of maintaining a dynamic stress test modeling
framework that achieves the goals of the Board's stress test program,
and operational burden in administering the program.
The Board proposed to define a ``material model change'' as a model
change that could have, in the Board's estimation, an impact on the
post-stress common equity tier 1 capital ratio of any firm, or on the
average post-stress common equity tier 1 capital ratios of all firms
required to participate in the upcoming stress test cycle, based on the
prior year's severely adverse scenario and prior year's input data,
equal to (i) a change of 20 basis points or more in the projected
common equity tier 1 ratio of any firm participating in the upcoming
stress test cycle; or (ii) a change of 10 basis points or more in the
average of the absolute value of each firm's change in projected common
equity tier 1 ratio.\46\ The Board proposed to apply this definition of
a material model change such that the individual materiality threshold
would apply to all firms required to participate in the next stress
test, and such that the Board's estimation of whether a change meets
the aggregate materiality threshold would be determined across all
firms required to participate in the next stress test.
---------------------------------------------------------------------------
\46\ The Board would take the absolute value of each firm's
change in projected common equity tier 1 ratio, then average those
values. If the average is 10 basis points or greater, the change
would constitute a material model change.
---------------------------------------------------------------------------
The proposed rule did not establish a specific deadline by which
the Board would publish material model changes for public input or the
length of the public input period. However, the proposal asked for
public feedback on the appropriate length of the public input period.
The Board received many comments on this aspect of the proposal.
Several commenters supported publishing material model changes for
comment, as described below in Section II.E and Section III.B of this
Supplementary Information. With respect to the proposed definition of
``material model change,'' some commenters disagreed with the inclusion
of a materiality threshold, suggesting that the Board instead publish
all changes to the models for comment, as described above in Sections
II.A and II.B of this Supplementary Information. One commenter stated
that the Board's proposed definition of ``material'' model change does
not capture all changes that could result in significant effects on
stress test results. The commenter argued that, if the Board retains
the materiality threshold, it should be revised to capture changes to
models that are significant in aggregate for one year or over multiple
cycles and that the aggregation should be based on absolute value of
all changes rather than net impact. The commenter recommended a
threshold of a 10 basis point change in the aggregated impact of the
absolute value of changes for any particular firm. Without the
aggregate impact, the commenter asserted that the Board could influence
what is proposed as ``material'' based on its definition of an
individual change. The commenter also
[[Page 62883]]
recommended that the Board disclose the impact of each change. The
commenter suggested that the Board's definition of ``material changes''
should include changes that are below the capital materiality threshold
but have a substantial effect on losses associated with a particular
asset or exposure, which could potentially disincentivize stress tested
firms' participation in affected markets. The commenter also proposed
certain principles for defining materiality, including that immaterial
changes should not affect a firm's capital requirement; that immaterial
changes should not affect the incentives that firms have to enter or
exit a particular business; and that materiality analysis should be
robust to different scenarios and jump-off data.
Other commenters opposed subjecting material model changes to
public input because the increased transparency would reduce the
dynamism of the stress test and undermine its purposes. These
commenters noted that the public comment process would slow the
development of the Board's models, making them out-of-date and
therefore unable to capture salient and evolving risks. The Board also
considered comments discussed above in Section II.A and Section II.B of
this Supplementary Information, which raised concerns that the model
disclosure process would pose risks to the Board's stress testing
program, and that the public input process could introduce challenges
in completing the annual stress test cycle. Additional discussion of
comments regarding the purposes of the proposal are described above in
Section I.E-G of this Supplementary Information.
Commenters also provided feedback on how the Board would calculate
materiality. One commenter stated that the Board should use two years
of data in the materiality analysis because materiality could change
based on the scenario or jump-off data. Alternatively, the commenter
proposed that the Board could periodically conduct and publish
sensitivity analysis on material changes. Another commenter stated that
the proposed definition of ``material model change'' would be defined
based on the firms that are required to participate in a given year's
stress testing cycle, which excluded firms subject to Category IV
standards in years when those firms are not required to participate in
the stress test. The commenter recommended that the effects of a model
change on firms subject to Category IV standards be reflected in the
materiality analysis, including in years when a firm subject to
Category IV standards is not required to participate in the stress
test.
With respect to the proposed public input process for material
model changes, several commenters supported the Board's proposal to
respond to substantive comments on material model changes. One
commenter suggested that the Board publish proposed model changes by
August 31 of the year prior to the stress test, and adopt a 60-day
comment period for proposed model changes. One commenter suggested that
the Board adopt a phased disclosure process that initially presents
only high-level information to mitigate the risk that firms reverse-
engineer the results of the stress test. Another commenter suggested
that the Board codify the timing for proposing material model changes
and disclosing all other changes. The commenter also recommended that
the model disclosure timeline be revised so that final models are
published in advance of capital plan submission dates, which is
discussed below in Section II.E of this Supplementary Information.
As described above in Section II.B of this Supplementary
Information, the Board also considered comments that stated the Board's
approach would violate the Administrative Procedure Act and the Due
Process Clause of the U.S. Constitution. This commenter asserted that
limiting proposed model changes to only those that are material
violates the APA and the Due Process Clause of the U.S. Constitution.
The commenter argued that the models themselves are legislative rules,
and thus they can only be amended by a legislative rule. The commenter
further asserted that a materiality threshold is inconsistent with the
letter and spirit of the APA and noted that the APA allows flexibility
(like interim final rules or direct final rulemaking) for rare cases
when the Board would need to make urgent changes. The commenter argued
that the Board should publish the full suite of stress test models each
year but should still specify the changes made and the impact from each
change.
In addition, the commenter argued that limiting proposed model
changes to only those that are material is ambiguous and increases
administrative burdens on the Board and firms, and further said that
the Board would need to determine and explain the scope of ``model
change'' and ``material model change.'' The Board also considered
comments discussed above in Section II of this Supplementary
Information, which raised concerns that the model disclosure process
would pose risks to the Board's stress testing program, and that the
public input process could introduce challenges in compressing the
annual stress test cycle. The Board also received comments on the
proposal's definition of ``model change'' together with comments on the
proposal's definition of ``material model change,'' which are addressed
here and above in Section II.B of this Supplementary Information.
The Board is finalizing this aspect of the proposal with
adjustments, as explained below. In considering the comments on the
proposal, the Board is revising the proposal's definition of ``material
model change'' to include all of the firms subject to the stress test,
as described below, rather than only those firms subject to the stress
test in a given year. This approach expands the set of firms considered
and is expected to result in more model changes meeting the threshold
for a ``material model change.'' Under this approach, a ``material
model change'' will be defined as any model change resulting in either
(i) an impact of 20 basis points or more to the projected common equity
tier 1 capital ratio of any ``materiality determination company'' (as
defined below), or (ii) a change of 10 basis points or more in the
average of the absolute value of changes in the projected common equity
tier 1 capital ratio for all materiality determination companies.\47\
The Board is defining a materiality determination company to mean any
company that (1) in at least one of the past two stress test cycles,
has been subject to the Board's stress test analysis, (2) in both the
year prior to the year in which the stress test is performed and the
year in which the stress test is performed, is subject to the stress
test rules, and (3) has average total consolidated assets of at least
$100 billion, as of the date of disclosure of material model changes.
The Board is also establishing that material model changes will be
published for public input by August 31 of the year prior to the year
in which the stress test will be administered, for a period of at least
30 days.
---------------------------------------------------------------------------
\47\ Regarding (ii), the Board will take the absolute value of
each materiality determination company's change in projected common
equity tier 1 ratio, then average those values. If the average is 10
basis points or greater, the change will constitute a material model
change.
---------------------------------------------------------------------------
As described above in Section II.B of this Supplementary
Information, the Board considered the range of comments on this aspect
of the proposal, including those that suggested that all changes to the
Board's stress test models should be published for public input, as
well as other comments that suggested that none of the models should be
put out for comment, or that only a portion of the models or aspects
[[Page 62884]]
of the models should be published for public input.
As described in the proposal, a materiality threshold is important
because many adjustments to models and model changes are necessary to
ensure that the models remain dynamic (i.e., can be enhanced to capture
emerging risks), produce reasonable results, identify salient risks at
firms, and maintain an optimal level of robustness and stability. Many
of these adjustments typically occur throughout the annual stress test
cycle, including after scenarios are published. This threshold allows
the Board to refine and enhance its models to reflect advances in
modeling techniques, respond to model validation findings, incorporate
richer and more detailed data, or identify more stable models or models
with improved performance, particularly under stressful economic
conditions. The Board's process for making these adjustments is an
important aspect of the modeling framework and helps to ensure that the
stress test models can more quickly capture changes in borrower and
lender behavior, as well as in bank business practices.
In addition, the Board has sometimes needed to make changes to its
stress test models while the stress test is ongoing. These changes have
often been in response to unforeseen events or circumstances and are
necessary to ensure that model output is reasonable. For example,
during the COVID-19 pandemic, the vacancy rates for hotel properties
were unprecedented, and the Board made certain adjustments to yield
sensible commercial real estate loan losses in the model output.
Without these in-cycle changes, the results of the stress test would
have been irrational and may have led to stress capital buffer
requirements that were not commensurate with certain firms' risk
profiles, including results that may have overstated firm risk
profiles.
In the Board's judgment, it is not necessary or practical to
solicit public input on every adjustment and model change before
implementing them in an annual stress test. The Board proposed and
received input on the comprehensive disclosure of all of the stress
test models as part of the proposal in 2025. While the Board is
establishing a process to ensure that material model changes will be
published for input before implementing them in the future, repetition
of a comprehensive model publication, comment, and review process every
year is not necessary for the models that have already received public
input. An annual process for commenting on all of the stress test
models would significantly increase the uncertainty related to the
stress test models year to year, reduce the focus of the public input
process on any material model changes, and demand significant resources
from firms and the Board to administer each year.
As explained above in Section II.B, the public disclosure process
for other, non-material changes or adjustments to the models will
provide an appropriate level of transparency and opportunity for
feedback on these changes without posing significant operational
challenges or resulting in excessive volumes and publications within
each stress test cycle. This approach balances the benefit of public
feedback with the operational and resource costs of seeking such
feedback. It also allows the Board to make timely model adjustments to
ensure reasonable results, consistent with the purposes of the stress
test program. For example, many econometric models are updated annually
to ensure that they are relevant and incorporate data that reflects the
current business environment.
Notably, the Board would not implement any in-cycle adjustments
that are considered material model changes prior to seeking public
input on the adjustments. In addition, the Board would review and
respond to all substantive public input on material model changes
before implementing the changes in the stress test.
With respect to the specific thresholds in the definition of
materiality, the Board considered the comments and determined to keep
the proposed threshold of a 20 basis point change in the common equity
tier 1 capital ratio for individual firms. This threshold will ensure
that the public can comment on any change likely to affect a firm's
stress capital buffer requirement prior to its implementation.
Considering the history of recent model changes, and the finalization
of the Volatility Proposal, a threshold of 20 basis points would
generally scope in model changes that involve conceptual enhancements
to model specifications, such as to incorporate improved modeling
techniques or to capture emerging risks. It would scope out those
changes that are simpler model refinements, such as those implemented
to ensure that the models maintain consistency given changing
requirements (e.g., refinements made to accommodate the transition from
the London Interbank Offered Rate to SOFR). Therefore, changes of
smaller magnitudes would be unlikely to impact a firm's stress capital
buffer requirement, particularly because the Board has also adopted the
proposed two-year averaging approach to calculate a firm's stress
capital buffer requirement.\48\
---------------------------------------------------------------------------
\48\ See 90 FR 16843 (Apr. 22, 2025).
---------------------------------------------------------------------------
The Board is also finalizing the threshold of a 10 basis point
average change in the absolute value of the change to each firm's
projected common equity tier 1 capital ratio. The Board will take the
absolute value of each firm's change in projected common equity tier 1
ratio following a specific model change, then it will average those
values. If the average is 10 basis points or greater, the change would
constitute a material model change. This additional threshold covers
cases when a model change has minimal individual impacts but has a
notable aggregate impact on the firms subject to supervisory stress
test requirements. The Board selected 10 basis points for this
aggregate prong because a model change of this size would be likely to
impact the aggregate projected common equity tier 1 capital ratio
decline, which is rounded to 0.1 percent or 10 basis points. The
aggregate projected CET1 capital decline is a frequently cited metric
from the annual stress test and a salient measure of the health of the
banking system. A change that satisfies one or both of the materiality
thresholds would be considered a material model change. The Board
considers this two-prong approach to be reasonable and appropriate for
identifying the most important model changes that should receive public
input prior to implementation.
In a change from the proposal, the Board adjusted the scope of
firms included in the materiality analysis to include firms that (1) in
at least one of the past two stress test cycles, have been subject to
the Board's stress test analysis, (2) in both the year prior to the
year in which the stress test is performed and the year in which the
stress test is performed, are subject to the stress test rules, and (3)
have average total consolidated assets of at least $100 billion, as of
the date of disclosure of material model changes. Under this approach,
the Board will consider a model change's impact on all firms that have
at least $100 billion in total consolidated assets, and which have
completed transition arrangements and continue to be subject to the
stress test, regardless of whether those firms are actually required to
participate in the upcoming stress test cycle. This approach will
increase the operational burden associated with administering this
aspect of the stress test program, but it will help ensure that firms
and the public can provide input on adjustments to the Board's stress
test
[[Page 62885]]
models that materially affect a firm's results, even if that firm is
not participating in the current year's test.
The Board also considered comments that recommended that the Board
conduct the materiality assessment at a more granular level or that the
Board disclose additional information about the analysis in its
disclosures. As explained in the proposal, the Board proposed
conducting the materiality assessment without aggregating or netting
across component models. The Board is finalizing this materiality
assessment as proposed. For example, if the Board proposed a change to
both the Pre-Provision Net Revenue Model and Corporate Model in the
same stress test cycle, the Board would estimate the effects of each
change separately for purposes of determining materiality. Similarly,
for purposes of assessing materiality, model changes would not be
aggregated or netted within component models. For example, if the Board
proposed two changes to a component model, the Board would evaluate the
materiality of each change separately. Conducting the assessment
without aggregating or netting across component models will better
ensure that the impact of each model change is considered individually,
and that the public will have an opportunity to provide input on
material model changes.
With respect to the form of disclosure of material model changes,
the Board considered comments suggesting that the Board should disclose
all model adjustments and provide a measurement of their expected
impact. Consistent with the description above in Sections II.A-B of
this Supplementary Information, the Board is not adopting a formal
template or criteria for disclosing these adjustments. Rather, the
Board expects to continue to utilize the existing format for
identifying model adjustments. The model documentation is maintained on
the Board's website and includes a document describing model changes
year to year.\49\ Consistent with the disclosure methods described in
this Section and Section II.A of this Supplementary Information, in
order to provide transparency about adjustments to the models year to
year, the Board will propose material model changes each year by August
31, and then, as appropriate, include such changes in applicable model
documentation published by May 15.\50\ Additionally, the Board expects
to provide a measurement of impact for proposed material model changes
during a given year.
---------------------------------------------------------------------------
\49\ See, e.g., Board, Dodd-Frank Act Stress Tests 2026 (Jun.
2026), <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>.
\50\ As noted in Section II.A of this Supplementary Information,
the Board could make late-stage updates to the models, potentially
after May 15. In these cases, documentation of the updates would be
published no later than the date of results disclosure.
---------------------------------------------------------------------------
Additionally, the final rule specifies that the public input period
for material model changes will be at least 30 days. The Board will
evaluate the nature and extent of any material model changes that are
proposed for public input and may select a longer comment period if a
longer period more appropriately balances the public's interest in a
reasonable opportunity to provide input with the Board's operational
limitations within the annual stress test cycle. In most cases, a
comment period for 30, 45, or 60 days is expected to be reasonable and
practical for these purposes. However, the Board considered that the
volume and nature of material model changes will vary year to year, and
therefore determined that a degree of flexibility in this process would
best ensure that the public has a reasonable public input period for
material model changes for a given year.
Finally, as described above in Section II.B of this Supplementary
Information, the Board also considered comments that stated the Board's
approach would violate the Administrative Procedure Act and the Due
Process Clause of the U.S. Constitution. The Board considered these
comments and determined to finalize as proposed the form of the models,
scenarios, scenario guides, and other aspects of the stress capital
buffer requirement determination process. The structure of the Board's
existing stress capital buffer requirement determination process allows
the Board to ensure the stress test can meet its statutory and
regulatory objectives by remaining robust, flexible, and able to
address changing market conditions. In reaching this determination, the
Board considered the public's interest in transparency, the goals of
the stress test, and the Board's legal obligations. The purposes of
this final rule are described in greater detail in Section I.G of this
Supplementary Information.
D. Annual Disclosure of Scenarios
Under the proposal, the Board would have annually published for
public input the proposed stress test scenarios by October 15 of the
calendar year prior to the stress test, for at least a 30-day period.
This approach was intended to permit sufficient time for the Board to
consider and respond to comments and to finalize the scenarios within
the current window for publication by February 15 of each annual stress
test cycle.\51\ This disclosure, along with the implementation of
additional scenario variable guides and revisions to the Scenario
Design Policy Statement, were intended to meaningfully improve the
transparency, public accountability, and predictability of the annual
stress tests, while mitigating risks that could materialize if the
proposed scenarios were disclosed prior to the jump-off date of the
supervisory stress test. The Board explained the purpose of the
proposal's timeline and its interactions with other parts of the stress
test calendar, as well as asked several questions in order to solicit
public input on other changes to the stress test calendar that could be
necessary to incorporate annual disclosure of scenarios.\52\
---------------------------------------------------------------------------
\51\ Trading or other components of the scenarios, and any
additional scenarios used by the Board, would continue to be
communicated by March 1 of the calendar year in which the stress
test is performed. 12 CFR 238.132(b); 12 CFR 238.143(b)(2)(i); 12
CFR 252.14(b)(2)(i); 12 CFR 252.44(b); 12 CFR 252.54(b)(2)(i).
\52\ 90 FR 51856, 51873 (Nov. 18, 2025).
---------------------------------------------------------------------------
The Board received several comments on this aspect of the proposal.
Two commenters recommended that the Board publish proposed stress test
scenarios by January 5 each year, with final scenarios published by
February 28 of each year. These commenters recommended that the Board
retain the current December 31 jump-off date, as discussed in Section
II.E of this Supplementary Information, and also recommended that the
comment period for scenarios not begin until after the jump-off date
has occurred. These commenters stated that the scenario comment period
should be at least 15 days to accommodate publication of final
scenarios in February. One of these commenters noted that this timeline
would provide the Board with 40 days to consider and respond to any
comments on the proposed scenarios. Another commenter agreed that the
Board should retain the December 31 jump-off date with the Board
publishing the proposed scenario in early January and completing the
annual stress test by June 30. The Board also considered comments that
provided input on whether the Board should publish scenarios for public
input, which is discussed in greater detail in Section II.D of this
Supplementary Information.
The Board is finalizing this aspect of the proposal with changes to
accommodate the public input process while retaining the December 31
stress test jump-off date, as described in greater detail in Section
II.E.1 of this
[[Page 62886]]
Supplementary Information. Under the final rule, the Board will propose
scenarios for the stress test by January 10, with final scenarios
published by February 28. The Board will provide a public input period
of at least 30 days. The final rule establishes that the publication of
final scenarios will occur by February 28, which will provide the Board
with sufficient time to respond to public input and update applicable
materials between the end of the public input period and the
publication date.
The Board determined that it would publish the proposed scenarios
only after the annual stress test jump-off date to mitigate the risk
that firms could adjust their balance sheets after the publication of
the proposed scenarios. As a result, to retain the December 31 jump-off
date, the Board recognized that it would be necessary to provide a
limited period for input on annual scenarios in order to minimize
adjustments to, and operational risks for, the remaining milestones in
the annual stress test.
The Board selected January 10 for the disclosure of proposed
scenarios. The Board did not select an earlier date to limit potential
operational challenges at the beginning of the calendar year. When
possible, the Board will publish proposed scenarios prior to this date
but after December 31 of the previous calendar year. The Board selected
February 28 as the publication date for final scenarios in order to
provide the public with additional time to review the proposed
scenarios, and for the Board to consider any comments received and
adjust the scenarios due to incoming data, as necessary and
appropriate. When possible, the Board will publish final scenarios in
advance of February 28. If this timeline presents challenges for the
public or the Board, the Board will consider and propose additional
adjustments to these dates in a future action.
As explained in the proposal, by designing and publishing the
revisions to the Scenario Design Policy Statement, including the guides
described in Section VI.G of this Supplementary Information, the Board
expects that the annual severely adverse scenarios will generally be
more consistent and predictable year-to-year. As a result, the Board
weighed whether publishing the annual scenarios for comment in a
typical year would contribute meaningful additional accountability that
would improve the stress test program, and whether the Board should
limit publication of the annual scenarios for public input to
situations where the Board is proposing to incorporate a salient risk
into the scenarios that is not described in this proposal. However, in
the interest of enhancing transparency and public accountability, the
Board determined to finalize a process that involves the publication of
proposed and final annual scenarios and the receipt of public input,
with the process formalized through changes to Regulations LL and YY.
Additionally, the Board is updating its existing delegations of
authority to be consistent with this revised process, so that a joint
determination by the Director of the Division of Supervision and
Regulation and the Director of the Division of Financial Stability,
with the concurrence of the Chair of the Board's Committee on
Supervision and Regulation, would continue to apply to the proposed and
final scenarios that may be published in the Federal Register going
forward.\53\
---------------------------------------------------------------------------
\53\ See 12 CFR 265.7(c)(11); 12 CFR 265.13(a)(1).
---------------------------------------------------------------------------
E. Other Revisions to the Stress Testing and Capital Plan Rules
The Board also proposed to revise the stress testing and capital
plan rules to reflect the Board's efforts to disclose more information
about the stress test scenarios and allow time for those additional
processes. The Board is finalizing this aspect of the proposal, with
several enhancements and adjustments to accommodate the public input
process, as described in Section III of this Supplementary Information,
and the retention of the current stress test jump-off date.
1. Stress Test Jump-Off Date Change
Under the proposal, the Board would have modified the jump-off date
of the supervisory and company-run stress tests from December 31 to
September 30, while leaving unchanged the other dates associated with
publication of the final scenario and stress test results.\54\ In the
proposal, the Board explained that the disclosure of the proposed
scenarios prior to the jump-off date of the supervisory stress test
could incent firms to temporarily modify their businesses to affect the
results of the stress test without changing the actual risk profile of
the firms. Such changes to firm business profiles could also result in
greater than typical quarter-to-quarter variability in the banking
books of firms. The Board proposed moving the jump-off date to
September 30 to address this potential risk associated with increased
transparency. In the proposal, the Board also acknowledged that this
change would affect other aspects and dates in the established annual
stress test cycle, such as the capital plan submission dates, and also
requested feedback from the public on whether it would be appropriate
to implement other modifications to limit the ability of firms to
adjust their balance sheets in response to the proposed scenario prior
to the jump-off date of the stress test.
---------------------------------------------------------------------------
\54\ The Board has experience operating the annual supervisory
stress test with a September 30 jump-off date. See, e.g., Board,
2015 Supervisory Scenarios for Annual Stress Tests Required under
the Dodd-Frank Act Stress Testing Rules and the Capital Plan Rule
(Oct. 23, 2014), <a href="https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20141023a1.pdf">https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20141023a1.pdf</a>.
---------------------------------------------------------------------------
Two commenters supported the proposed jump-off date of September
30, stating that the change would prevent firms from adjusting their
exposures based on the proposed scenarios, and that the additional full
quarter of execution time would reduce operational burden without
compressing the capital planning cycle or interfering with year-end
reporting.
However, many other commenters opposed the proposed change and
suggested that the Board retain December 31 as the jump-off date. These
commenters generally stated that the proposal would increase
operational burden for firms subject to the stress test, as other
stress testing regulations promulgated by other federal agencies would
be expected to continue to use December 31. Some commenters stated that
the approach would add an additional quarter of staleness into the
stress test, which would result in a less accurate measure of bank
resilience, or that a September 30 date would introduce more seasonable
variability into the stress test, causing volatility in results. Other
commenters noted that an advantage of the December 31 jump-off date is
that it aligns with other year-end reporting obligations, as well as
capital and liquidity planning milestones, for firms subject to the
stress test.
Many commenters that opposed changing the jump-off date suggested
that it was unnecessary to mitigate risks that firms could adjust their
balance sheets after the publication of the proposed scenario. These
commenters argued that it would be impractical for firms subject to the
stress test to make meaningful balance sheet adjustments after the
publication of the proposed scenario.
Some of these commenters also recommended that the Board consider
alternative approaches to achieve its goals of collecting public input
and avoiding incentivizing firms to adjust their balance sheets. These
alternative approaches are discussed in greater detail in Section
II.E.2 and II.E.3 of this Supplementary Information.
[[Page 62887]]
The Board will not adopt the proposed jump-off date of September
30, and will retain the December 31 date in the final rule. However, as
described in Section III of this Supplementary Information, the Board
is making additional adjustments to the stress test calendar in order
to accommodate the public input process while mitigating risks that
firms could adjust their balance sheets following the disclosure of a
proposed scenario.
In considering the comments on the proposal, the Board recognized
that the shift to September 30 was likely to introduce significant
operational and administrative burden for most firms subject to the
stress test. Furthermore, a December 31 jump-off date better aligns
with most firms' year end processes and capital planning activities,
and it ensures that the stress test is based upon more recent and
relevant data. However, the Board considers it necessary to make
additional adjustments to the annual stress test cycle in order to
accommodate the public input process and mitigate risks that firms
adjust their balance sheets due to the publication of proposed
components of the stress test prior to the jump-off date. These
additional adjustments are described in Section II.E of this
Supplementary Information.
2. Global Market Shock Scenarios, Date, Notifications, and
Applicability
The global market shock (GMS) component has historically been
applied to market risk positions held by firms on a given as-of
date.\55\ Under the Board's regulations, the GMS component can apply to
both the supervisory stress test and the company-run stress test for
applicable firms.\56\ The Board also has authority to require a covered
company to include one or more additional components in its severely
adverse scenario in the stress test required by this section based on
the company's financial condition, size, complexity, risk profile,
scope of operations, or activities, or risks to the U.S. economy.\57\
---------------------------------------------------------------------------
\55\ See, e.g., 12 CFR 238.143(b)(2); 12 CFR 252.14(b)(2); 12
CFR 252.54(b)(2).
\56\ Id.
\57\ 12 CFR 252.14(b)(2)(ii); 12 CFR 252.54(b)(2)(ii); 12 CFR
238.143(b)(2)(ii).
---------------------------------------------------------------------------
Under the proposal, the Board would have revised the date range for
the GMS as-of date to occur between (inclusive of) October 1 of the
calendar year two years prior to the year in which the stress test is
performed to (exclusive of) October 1 of the calendar year one year
prior to the year in which the stress test is performed. The current
GMS as-of date range is established for company-run stress tests, and
extends between (inclusive of) October 1 of the year prior to the
stress test to (exclusive of) March 1 of the year of the stress
test.\58\ In the proposal, the Board explained that a wider date range
would allow the Board to capture a broader set of market risks across
different time periods, thereby improving the risk capture of the
global market shock. The Board has historically selected a cycle-
specific as-of date each year and, typically, announced it to firms
about two weeks later to ensure that firms retain necessary data. The
as-of date is expected to change from year to year to avoid creating
potential incentives for firms to take temporary trading positions.
However, in practice, there is a comprehensive date selection process
that shortens the actual window during which the GMS as-of date is
generally selected. As described in this Section of the Supplementary
Information, certain changes are implemented through revisions to the
Board's stress test regulations, while other changes are implemented
through revisions to the Board's Scenario Design Policy Statement or
the model documentation for the global market shock component.\59\
---------------------------------------------------------------------------
\58\ See, e.g., 12 CFR 238.143(b)(2); 12 CFR 252.14(b)(2); 12
CFR 252.54(b)(2).
\59\ Current and historical documentation is available on the
Board's website. See, e.g., Board, Dodd-Frank Act Stress Tests 2026
(Jun. 2026), <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>.
---------------------------------------------------------------------------
For the supervisory stress test and the company-run stress test,
the Board has generally provided each affected firm with a description
of the GMS scenario and with the specific GMS as-of date by March 1 of
the year in which the stress test occurs.\60\ For the company-run
stress test, the Board is generally required to also notify each
affected firm by December 31 of year preceding the stress test that the
firm is required to include additional components or scenarios in its
company-run stress test.\61\ To align the GMS component with the other
proposed changes to the annual stress test cycle, the Board proposed to
change the date by which the Board needs to notify affected firms of
this as-of date from March 1 of the year in which the stress test
occurs to October 15 of the calendar year one year prior to the year in
which the stress test is performed. Finally, the Board also proposed to
change the date by which the Board must notify firms that they are
required to include additional components or scenarios in their
company-run stress test from December 31 to September 30 of the year
preceding the stress test. This change would have ensured that firms
are aware of the components to which they would be subject prior to the
annual publication of the proposed scenarios.
---------------------------------------------------------------------------
\60\ See, e.g., 12 CFR 238.132(b); 12 CFR 238.143(b)(2); 12 CFR
252.14(b)(2); 12 CFR 252.44(b); 12 CFR 252.54(b)(2).
\61\ See, e.g., 12 CFR 238.143(b)(4)(i); 12 CFR 252.14(b)(4)(i);
12 CFR 252.54(b)(4)(i).
---------------------------------------------------------------------------
As part of the proposal, the Board did not propose to change the
number of GMS components applied to firms' positions. However, the
Board sought comment on whether it should consider alternative
approaches to increase the risk captures of the GMS, including by
applying the GMS to more than one as-of date or using more than one set
of shocks in a given stress test.
The Board received many comments on this aspect of the proposal.
With respect to the proposed one-year window for the GMS component as-
of date, most commenters recommended that the Board retain the current
five-month window. These commenters stated that the proposed one-year
window would increase burden and operational complexity for firms
subject to the supervisory stress test. They stated that the longer
window would require firms to calculate and maintain records of daily
portfolio compositions and price sensitivities. One commenter explained
that a one-year cycle could cause firms to rely on manual controls to
preserve trading and counterparty information needed to calculate the
GMS data that firms must provide to the Board, which could complicate
model governance and could introduce additional volatility in stress
test results.
Other commenters suggested that the Board adopt alternative GMS
windows. One commenter suggested that the Board adopt a different
window, from May to October of the year prior to the year of the stress
test, to improve the Board's flexibility without imposing additional
challenges and burdens on firms subject to the stress test. Another
commenter suggested that the Board shift the window to August 1 to
December 31, stating that any concerns about balance sheet adjustments
following the publication of stress test scenarios could be mitigated
through ongoing monitoring and supervision.
Other commenters opposed the expansion of the GMS window because
the one-year period would permit the Board to conduct the GMS component
using firm data and market conditions that would be relatively more
stale. One of these commenters asserted that this issue would be
further compounded if the Volatility Proposal were to be adopted
because that proposal would
[[Page 62888]]
average the results of two consecutive stress tests to inform stress
capital buffer requirements.
With respect to the number of GMS scenarios, one commenter
recommended retaining the Board's current approach of using a single
GMS scenario. As an alternative, the commenter also recommended
adopting a two-month window with two GMS scenarios applied on a single
as-of date. The commenter suggested that two GMS scenarios would
sufficiently capture trading book dynamics while balancing burden and
the Board's principle of simplicity. Other commenters expressed concern
about ``window dressing,'' whereby firms could temporarily adjust their
balance sheets to reduce losses from the GMS component without reducing
actual risk. These commenters recommended that the Board apply two GMS
scenarios with the same as-of date. One commenter further recommended
that if the Board adopted a second GMS scenario, then the Board should
average the results of the two scenarios to calculate GMS losses in the
stress test, while another commenter suggested that the Board use the
results of the scenario that showed greater losses to calculate GMS
losses in the stress test. Another commenter opposed an approach where
the Board would adopt two GMS scenarios, stating that it would add
significant costs without advancing the objectives or usefulness of the
supervisory stress test. One commenter suggested that, if the two GMS
scenarios approach were adopted, the Board should eliminate exploratory
scenarios, which do not impact stress test results, and reduce data
requests.
Regarding the proposed changes to GMS component notifications, one
commenter recommended disclosing the GMS as-of date, once chosen,
publicly rather than only to firms subject to the GMS. The commenter
stated that some firms voluntarily run the GMS scenario and would
benefit from earlier knowledge of the as-of date. Two commenters asked
that the Board codify its usual practice of providing notice of the GMS
as-of date within two weeks of that date. These commenters noted that
codifying the period would provide certainty to firms about when they
must preserve trading and counterparty data, which is important given
the costs of data retention.
Commenters also provided feedback on a question raised by the Board
in the proposal that requested feedback on the current applicability of
the GMS component to firms subject to Category I, II, and III standards
that have aggregate trading assets and liabilities of $50 billion or
more, or trading assets and liabilities equal to or greater than 10
percent of total consolidated assets. Commenters generally recommended
that the Board reconsider these thresholds or recalibrate them. One
commenter stated that the GMS component imposed an outsized burden on
intermediate holding companies of foreign banking organizations because
these entities are generally smaller than their domestic counterparts
subject to the GMS component, but compliance costs represent a fixed
cost for each such firm.
Some commenters recommended that the $50 billion threshold be
revised to account for economic growth and inflation, including through
an automatic mechanism to adjust the threshold over time. Commenters
also suggested that the GMS threshold should be tailored across the
firms subject to Category I, II, and III standards, so that the GMS
would apply differently to those firms based on their respective
category in a way that balances the prudential benefits of the GMS
component with the burdens imposed on firms. One commenter suggested
that the Board revise the threshold to $200 billion or more, arguing
that firms below this threshold face a high operational burden if they
are subject to the GMS component. This commenter also stated that
changes to the Basel capital framework would sufficiently capture
market risks for firms below a $200 billion threshold. Another
commenter suggested increasing the threshold to $100 billion, with
further indexing to account for inflation and economic growth.
Other commenters suggested removing the prong of the threshold that
applies the GMS to firms with aggregate trading assets and liabilities
equal to 10 percent or more of total consolidated assets. One commenter
stated that this prong was not relevant to determining the systemic
risk that a firm might pose, and that for firms that meet this
threshold but do not pose risks to financial stability, the existing
market risk capital requirements and the other components of the
severely adverse scenario already ensure sufficient capital. This
commenter stated that the ongoing operational burden of the GMS
component was not justified by the incremental capital effect of the
GMS component. This commenter suggested that the Board replace the
existing thresholds with other objective criteria to determine which
firms have substantial trading or custodial operations. Another
commenter suggested removing U.S. Treasury securities from the
calculation of trading assets and liabilities, arguing that they do not
pose the same risks as other trading assets and are not subject to the
same regulatory treatment.
After considering the comments, the Board is adopting this final
rule with three changes from the proposal to improve risk capture, in
alignment with the Board's stress testing principle of conservatism,
and to mitigate compliance burden. First, the final rule includes a 9-
month GMS as-of date window, spanning from April 1 to December 31 of
the calendar year prior to the year the stress test is administered.
Second, the final rule codifies the practice that the Board notify
applicable firms of the GMS as-of date within two weeks after the date.
Third, the revisions to the Scenario Design Policy Statement specify
that the Board expects to have two GMS scenarios on a single as-of date
for a single stress test, and that the Board will use the maximum loss
of the combined trading and counterparty results across both GMS
scenarios to determine a firm's stress test results. These changes are
discussed below.
Separately, the Board is not adopting any changes to the GMS
applicability threshold as part of this final rule, nor is the Board
adjusting the Board's ability to conduct other analysis to inform
supervision or risks to financial stability, such as through
exploratory scenarios.
a. GMS as-of Date Window
After considering comments regarding the operational and data
retention burden of a 12-month GMS as-of date window, the Board is
adopting this final rule with a 9-month GMS as-of date window. By way
of example, this change would mean that for the 2028 supervisory stress
test, the GMS as-of date could fall on any date from April 1, 2027, to
December 31, 2027. Table 3 below describes the date ranges associated
with the current practice, the proposal, and the final rule.
[[Page 62889]]
[GRAPHIC] [TIFF OMITTED] TR02OC26.024
Adopting the 9-month as-of-date window in the final rule improves
risk capture compared to the current 5-month window. The 9-month window
will enable the Board to consider a wider array of potential GMS as-of
dates, especially because, in practice, the comprehensive selection
process eliminates a range of potential dates within the current
window. This wider set of potential dates will allow the as-of date to
occur under various economic and financial conditions and will avoid
creating potential incentives for firms to take temporary trading
positions in anticipation of the as-of date. Given the fluctuations in
firms' trading positions, the 9-month window provides the Board the
flexibility to capture a wider range of firms' portfolio compositions
and risk sensitivities. Additionally, the 9-month window would include
only dates prior to the release of the given stress test cycle's GMS
scenario for public input. Therefore, firms subject to the GMS would
not be able to use their knowledge of the GMS as-of date to optimize
their balance sheet positions or adjust their portfolios based on the
proposed GMS scenario.
The Board recognizes the potential operational burdens associated
with the 12-month as-of-date window in the proposal, as expressed by
some commenters. The 9-month window will best balance the objective of
improving risk capture with the potential operational burden that firms
could face. The 9-month window is longer than those recommended by many
commenters, but shorter than the 12-month window put forth in the
proposal. The window also does not extend as far back into the past as
put forth in the proposal, reducing the potential for staleness of the
stress test results. Compared to the 12-month window, the 9-month
window reduces the operational burden associated with long-term data
maintenance.
b. Two GMS Scenarios
As discussed above, the Board received several comments on the
possibility of having more than one GMS scenario. After considering
these comments, the Board is revising the Scenario Design Policy
Statement to state that the Board expects to select up to two GMS
scenarios that occur on a single as-of date for each annual stress
test. Historically, the Board has generally disclosed a single GMS
scenario for each stress test, and this component has been used to
calculate trading and counterparty losses. However, the single GMS
scenario has limited capability to capture risks in firms' portfolios
because different firms may be exposed to different directions of
shocks on the same as-of date. For example, one firm may experience
losses when the U.S. dollar appreciates compared to the Japanese Yen,
while another firm may experience gains in this situation. A second GMS
scenario will improve the risk capture of the stress test by allowing
the Board to capture a wider range of firms' vulnerabilities with
opposite directions of shocks.
Additionally, introducing a second GMS scenario is likely to reduce
year-over-year volatility in trading and counterparty losses. Under a
single GMS scenario, a change in the direction of the shocks from one
year to the next could lead to substantial variation in losses because
a firm's portfolio may be particularly exposed to shocks in one
direction. Due to differences in GMS scenarios from year to year, this
variability can occur even if a firm's portfolio remains unchanged. The
use of two GMS scenarios with potentially directionally opposite shocks
can mitigate this concern because both directions of the exposures can
be tested. With the introduction of a second GMS scenario, the Board
expects trading and counterparty losses to be more stable over time and
also more reflective of the changes in firms' risk exposures instead of
changes in scenarios.
The Board determined to use the largest combined trading and
counterparty losses across the two scenarios in each firm's stress test
results and to inform each firm's stress capital buffer requirement.
The Board also considered the option of averaging the GMS losses across
the two scenarios but determined that this approach would not
sufficiently reflect firms' vulnerabilities to a severe market shock.
Therefore, having two GMS scenarios in one stress test with the maximum
losses determining stress test results better ensures that firms are
appropriately capitalized to a broader range of market events. This
approach is discussed further in Section VI of this SUPPLEMENTARY
INFORMATION.
c. Codification of GMS Notification Date
While not currently required by the stress test rules, the Board
typically notifies applicable firms of the GMS as-of date within two
weeks after the as-of date. This notification ensures that these firms
can preserve trading and counterparty data for the as-of date. The
final rule codifies this practice so that the Board would be required
to notify firms subject to the GMS component of the date no later than
two weeks after the as-of date. The notification ensures that firms
subject to the GMS component retain necessary data, and reduces firms'
data retention burden. The public and all firms not subject to the GMS
component will continue to be notified of the as-of date when the
[[Page 62890]]
scenarios are proposed for a given stress test.
d. GMS Applicability Threshold
The Board considered comments on the current thresholds for
applicability of the GMS component. The current threshold includes
firms that have aggregate trading assets and liabilities of $50 billion
or more, or trading assets and liabilities of 10 percent of total
assets. This approach captures firms where market risk is a key risk.
With respect to the aggregate size of $50 billion or more, at this
time, the Board considers this threshold to be reasonably appropriate
to capture trading activities that are significant to the firm and to
markets. Any changes to this threshold would be accomplished through a
specific proposed rulemaking. With respect to the 10 percent prong,
this proportion represents a significant portion of the firm's total
assets, and it continues to be appropriate for the GMS component to
apply to these firms to more accurately identify the firm's trading
asset and liability risks. At this time, the Board considers it
appropriate to retain this threshold as an applicability criterion. The
Board expects any future changes to the GMS threshold to be preceded by
a proposal for public comment.
3. Other Adjustments to the Stress Test Cycle
As described in Section II of this SUPPLEMENTARY INFORMATION, the
proposal would have moved the jump-off date of the annual stress test
to September 30 to accommodate the public input process and mitigate
the risk of firms adjusting their balance sheets following the
publication of proposed scenarios prior to the jump-off date. Because
the Board is retaining the December 31 as-of date in this final rule,
the Board is also implementing additional changes to the annual stress
test cycle to complement this decision and support the goals of the
rulemaking.
As mentioned in Section II.E.1 of this SUPPLEMENTARY INFORMATION,
commenters suggested many alternative approaches to the proposed
September 30 jump-off date. These alternatives generally involved
additional changes to key dates in the annual stress test cycle. Two
commenters suggested that the Board retain the December 31 as-of date
and adjust the existing and proposed dates for several components of
the annual stress test, the capital plan submission deadline, and the
deadline to request reconsideration. One commenter also recommended
that preliminary stress capital buffer requirements, including any
enhanced disclosures, should be published by June 30, 2027, for the
2027 stress test cycle. The Board also considered input from one
commenter that stated that a compressed timeline for scenario
development and public comment within the annual stress test cycle
could impose challenges for the Board, including the Board's ability to
substantively incorporate feedback within an annual cycle.
The Board is finalizing several additional changes to milestones in
the annual stress test cycle as part of this final rule. While the
proposal did not include specific adjustments to these components of
the stress test rules, the Board asked detailed questions on the annual
stress test cycle, including many of the aspects described below, and
indicated that the Board was considering revisions to its rules to
achieve the purposes of the proposal. Furthermore, many commenters
provided suggestions to improve the annual stress test cycle and align
it with other changes to dates in the proposal. The changes described
below take into account the comments received, reduce regulatory
burden, and support the goals of the rulemaking and the stress test
program.
a. Biennial Opt-In for Category IV Firms
Under the current stress testing rules, Category IV bank holding
companies, Category IV U.S. intermediate holding companies, and
Category IV covered savings and loan holding companies subject to the
supervisory stress test may elect to have the Board conduct a stress
test with respect to that company in a year ending in an odd number by
January 15.\62\ This timing enables firms to consider their balance
sheets as of the stress test jump-off date (December 31) but prevents
these firms from considering the scenario when determining whether to
opt into the stress test. As explained above in Section II.D of this
SUPPLEMENTARY INFORMATION, the Board proposed to adjust the jump-off
date for the supervisory stress test in order to implement the annual
disclosure of scenarios for public input, while mitigating risks that
could materialize if the proposed scenarios were disclosed prior to the
jump-off date of the supervisory stress test. The Board asked several
questions in order to solicit public input on other changes to the
stress test calendar that could be necessary to incorporate annual
disclosure of scenarios for all of the firms subject to the supervisory
stress test.\63\
---------------------------------------------------------------------------
\62\ 12 CFR 252.44(d)(2)(ii); 12 CFR 238.132(c)(2)(ii).
\63\ 90 FR 51856, 51873.
---------------------------------------------------------------------------
The Board did not propose to change this opt in date and did not
receive any comments regarding this date. However, to accommodate the
publication of proposed scenarios by January 10, the final rule moves
the opt in date to January 5. This timing will enable firms to continue
to consider their balance sheets as of the stress test jump-off date
(December 31), but it will not allow them to consider the variable
paths specified in the proposed scenario.
b. Capital Plan Submission and Company-Run Stress Test Dates
The Board did not propose to change the April 5 submission date for
firms' annual capital plans or for firms subject to Category I-III
standards to conduct company-run stress tests. However, two commenters
recommended that the Board move the capital plan submission deadline to
April 30 of each year so that firms would have ample time to create and
review their capital plans following the publication of the final
scenarios. The process for proposing and finalizing scenarios is
described above; these commenters had recommended moving the final
scenario publication date to February 28 to accommodate a 15-day public
input period. In recommending that the Board move the capital plan
submission date to April 30, these commenters argued that certain
elements of the annual capital plans rely on information provided in
the final scenarios publication. One of these commenters recommended a
capital plan submission date of April 30 and the disclosure of final
models for a given stress test by March 31. This commenter argued that
this sequencing would improve capital plans because firms would have
ample time to review the final scenarios and model documentation prior
to submitting their annual capital plans.
In response to these comments, the final rule moves the deadline
for annual capital plan submissions and date by which applicable firms
must conduct company-run stress tests to April 30 to provide firms with
sufficient time to submit capital plans and conduct company-run stress
tests following the publication of the final scenarios. Firms need
information from the final scenarios to prepare annual capital plan
submissions and to conduct company-run stress tests, and these
deadlines give firms additional time to meet these requirements.
Relatedly, due to the connection between the data reported on the FR Y-
14A report and the data
[[Page 62891]]
submitted in firms' annual capital plans and in company-run stress
tests, the final rule also moves the submission date for all FR Y-14A
data not needed to calculate trading and counterparty losses in the
stress test to April 30. The FR Y-14A data needed to calculate trading
and counterparty losses will continue to be due April 5. Further
discussion of changes in FR Y-14A reporting requirements is discussed
in Section IV of this Supplementary Information.
c. Adjusted Capital Actions Deadline
Currently, firms subject to the supervisory stress test must notify
the Board of any adjustments to their planned capital actions within
two business days of receipt of notice of a stress capital buffer
requirement.\64\ The Board received one comment suggesting that the
Board revise this deadline to provide firms with 10 business days, in
order to reduce burden for firms and avoid rushed decision making.
---------------------------------------------------------------------------
\64\ 12 CFR 225.8(h)(2)(ii); 12 CFR 238.170(h)(2)(ii).
---------------------------------------------------------------------------
Under the final rule, the Board is retaining the requirement for
firms to notify the Board of any adjustments to their planned capital
actions within two business days of receipt of notice of their stress
capital buffer requirement. In the Board's experience, the current
deadline for adjustments to planned capital actions provides firms with
sufficient time to confidentially determine whether they wish to submit
adjusted capital actions and to support alignment of firm capital
actions and any applicable securities reporting obligations.
d. Final Stress Capital Buffer Requirement Notification Date
Currently, the Board provides firms subject to the supervisory
stress test with their final stress capital buffer requirements and
confirmed planned capital distributions by August 31 of the calendar
year that a capital plan was submitted.\65\ The Board received comments
on the stress capital buffer reconsideration request process that
suggested that the Board retain the August 31 calendar date unless the
stress capital buffer effective date is moved to January 1 of the year
after a capital plan was submitted. The commenter stated that if the
effective date of the stress capital buffer requirement is moved, then
the August 31 deadline should be extended by at least 30 days.
---------------------------------------------------------------------------
\65\ 12 CFR 225.8(h)(4)(i); 12 CFR 238.170(h)(4)(i).
---------------------------------------------------------------------------
Under the final rule, the stress capital buffer requirement
notification deadline will occur by September 30. This change is
appropriate to account for the revisions described above that grant
additional time for firms to submit reconsideration requests, while
also enabling the Board to process any such requests efficiently. It
also retains sufficient time between the notification date and the
effective date to allow firms to prepare for any changes in capital
requirements.\66\ Additional discussion of the Board's adjustment of
the effective date is included below and in the Volatility final rule.
---------------------------------------------------------------------------
\66\ The period between the notification and effective dates of
the stress capital buffer requirements would go from one month under
the current rule (August 31 to October 1) to three months under this
rule and the Volatility Rule (September 30 to January 1).
---------------------------------------------------------------------------
e. Stress Capital Buffer Effective Date
Finally, the Board is also revising the stress capital buffer
effective date, which is currently October 1, in a separate
rulemaking.\67\ As explained in the notice for the Volatility Rule,
that final rule revises the effective date to be January 1.
---------------------------------------------------------------------------
\67\ 12 CFR 225.8(h)(4)(ii)(A); 12 CFR 238.170(h)(4)(ii)(A).
---------------------------------------------------------------------------
4. Amendment to the Dividend Add-On Component Calculation
Under the proposal, the Board would have adjusted the dividend add-
on component of the stress capital buffer to align with the proposed
change to the jump-off date from December 31 to September 30. To
maintain alignment between the dividend add-on component of the stress
capital buffer requirement and the one-year period during which the
requirement is typically effective, the Board proposed to change the
dividend add-on component to cover dividends issued in quarters five
through eight, instead of quarters four through seven, of the planning
horizon of the supervisory stress test. This change would have involved
updates to the capital plan rules, at Regulation Y and Regulation LL,
to any references to the relevant quarters of the planning horizon.\68\
---------------------------------------------------------------------------
\68\ 12 CFR 225.8(f)(2)(i)(C)(1); 12 CFR 225.8(f)(4); 12 CFR
225.8(h)(2)(ii)(A); 12 CFR 225.8(h)(2)(ii)(B); 12 CFR 225.8(k)(2);
12 CFR 238.170(f)(2)(i)(C)(1); 12 CFR 238.170(f)(4); 12 CFR
238.170(h)(2)(ii)(A); 12 CFR 238.170(h)(2)(ii)(B); 12 CFR
238.170(k)(2).
---------------------------------------------------------------------------
The dividend add-on component of the stress capital buffer
requirement currently comprises planned dividends in the fourth through
seventh quarters of the planning (or projection) horizon of the
supervisory stress test.\69\ Under the current framework, the planned
dividends that are incorporated in the stress capital buffer
requirement align with the effective date of the stress capital buffer
requirement (that is, October 1 as the first day of the fourth quarter
of the existing planning horizon) and last for the one-year period
through which the stress capital buffer requirement is expected to be
effective (that is, through the seventh quarter of the existing
planning horizon, after which the following year's stress capital
buffer requirement would be expected to take effect).
---------------------------------------------------------------------------
\69\ See 12 CFR 225.8(d)(16); 12 CFR 238.130. The planning (or
projection) horizon for the supervisory stress test is nine
consecutive quarters starting on the jump-off date of the
supervisory stress test.
---------------------------------------------------------------------------
Commenters did not provide input on this specific aspect of the
proposal, but they did provide other feedback related to the dividend
add-on component. Several commenters recommended that the Board
eliminate the dividend add-on component of the stress test. These
commenters stated that this component is overly conservative and causes
firms to duplicate their capitalization of dividends, particularly with
the capital conservation buffer requirement and existing firm capital
management buffers. One commenter argued that the Board's previous
rationale for the dividend add-on component, which referenced
historical experience from the 2007-2009 financial crisis, was no
longer relevant.
Several commenters representing foreign banking organizations
specifically commented that the dividend add-on component should be
eliminated for foreign banking organizations with intermediate holding
companies. These commenters stated that dividends from the intermediate
holding company serve a different function for these foreign banking
organizations compared to domestic firms, as the dividends are
primarily a mechanism to upstream surplus capital to the foreign
banking organization parent. Noting that the dividend add-on component
does not apply to share repurchases, these commenters also stated that
the exclusion of share repurchases is not beneficial for intermediate
holding companies, giving domestic firms an advantage over foreign
banking organizations. Commenters also stated that dividends do not
pose the same reputational or systemic risk concerns for foreign
banking organizations as for domestic firms. These commenters suggested
that, if the Board retains the dividend add-on component, the Board
should adopt alternative approaches, such as scaling the component for
intermediate holding companies or using a discount approach to the
component for intermediate holding companies that is consistent with
recent domestic bank activity. Others suggested alternatives that would
involve recalibrating the dividend add-
[[Page 62892]]
on to reduce it as dividends are actually paid out over time.
The Board is declining to adopt the proposed change to the quarters
subject to the dividend add-on component in the final rule. As
explained in the proposal, this change to the dividend add-on component
was contingent upon changing the jump-off date to September 30.
Accordingly, the Board is not adjusting the planning horizon period for
planned dividends in this final rule.
Additionally, the Board is not eliminating the dividend add-on
component in response to comments. Removing the dividend add-on
component of the stress capital buffer was outside of the scope of the
proposal.
To align with the Board's principle of consistency and
comparability across firms, including intermediate holding companies of
foreign banking organizations, to ensure that all firms subject to the
stress test engage in appropriate capital planning, and to limit
procyclical aspects of the stress test, the final rule maintains that
the dividend add-on component applies to all firms and that it remains
constant over the period that a firm's applicable stress capital buffer
requirement is in effect.
F. Stress Capital Buffer Requirement Reconsideration Process
The Board did not propose to amend the Board's capital planning
rules that govern firm requests to reconsider the Board's calculation
of preliminary stress capital buffer requirements. The current rules
require firms to request reconsideration within 15 calendar days of
receiving notice of the preliminary requirement.\70\ Firms may also
request informal hearings with the Board to discuss reconsideration
requests.\71\ Though the Board did not propose any changes to this
process, the proposal requested public input on potential enhancements
to the stress capital buffer requirement reconsideration process,
including whether additional enhancements to this process would be
appropriate.
---------------------------------------------------------------------------
\70\ 12 CFR 225.8(h)(2)(i); 12 CFR 225.8(i)(2); 12 CFR
238.170(h)(2)(i); 12 CFR 238.170(i)(2).
\71\ 12 CFR 225.8(i)(3)(ii); 12 CFR 28.170(i)(3)(ii).
---------------------------------------------------------------------------
The Board received several comments on the reconsideration request
deadline, as well as the reconsideration request process itself.
Regarding the reconsideration request deadline, several commenters
suggested that the Board extend this deadline to either 15 business
days or 30 days or more, particularly if the stress capital buffer
effective date is moved to January 1, as was proposed in the Volatility
Proposal. These commenters stated that the Board's reconsideration
process should better align with the Board's supervisory appeals
process, and they stated that additional time would improve the
arguments presented by firms in their reconsideration requests, which
would reduce the risk of calculation errors while improving the
transparency, integrity, and credibility of the stress capital buffer
framework. Commenters also emphasized that reconsideration requests
should be due a reasonable period of time after firms receive firm-
specific results disclosures.
Regarding the Board's reconsideration request review process,
several commenters suggested that the Board provide additional
information or introduce new guardrails to the Board's review process.
Some commenters stated that the reconsideration process was inadequate
for firms to challenge stress capital buffer determinations. These
commenters recommended that the Board expand the scope of appealable
issues to include instances where results are unrealistic, overly
conservative, inconsistent with empirical performance, or conflict with
the Board's Stress Testing Policy Statement principles, even if no
modeling errors are identified. One commenter added that a firm should
be able to request reconsideration for any adjustment applied to its
results. One commenter further suggested that the Board codify the
permissible basis for which a firm could request reconsideration and
that the Board codify that the window for the request begin when firm-
specific disclosures are provided. The commenter suggested that the
Board publish a list of research issues identified in reconsideration
request letters and identify whether any changes to models were made in
response to reconsideration requests. Two commenters requested that the
Board define the criteria it considers in granting an informal hearing
in response to reconsideration requests. Another commenter suggested
that the Board create a transparency framework to track, implement, and
disclose the outcomes of all reconsideration requests, and that the
Board provide a response to each reconsideration request with the
Board's rationale for its decision making. Another commenter
recommended that the Board establish specific review timelines for
reconsideration requests.
The Board is revising the deadline by which a firm subject to the
supervisory stress test must request reconsideration. Under the final
rule, this request must occur within 15 business days after the
preliminary stress capital buffer notification occurs, replacing the
current deadline of 15 calendar days. This change is expected to reduce
burden on firms subject to the supervisory stress test while also
providing the Board with sufficient time to consider any such requests
and make appropriate adjustments prior to the disclosure and effective
date of final stress capital buffer requirements. The Board addressed
comments related to enhanced results disclosures in Section II.A of
this Supplementary Information.
With respect to comments suggesting changes to the Board's
reconsideration request review process, beyond those regarding the
window to request reconsideration, the Board is not adopting any
changes at this time. The current capital plan rules do not provide a
limit on the scope of a firm's reconsideration request. Instead, the
rules provide that, ``a request for reconsideration must include a
detailed explanation of why reconsideration should be granted.'' \72\
The Board has not established a scope of appealable issues and will
continue to implement a flexible approach that enables firms to request
reconsideration for any aspect of their stress capital buffer
requirement and on any basis. While the Board recognizes that
establishing a certain set of criteria or basis for reconsideration
could provide firms and the public with greater transparency around the
Board's reconsideration review process, the Board considers the current
broad scope appropriate to enable the Board to continue to engage with
firms in the reconsideration request process on an unrestrained scope
of issues identified by firms. Therefore, in the final rule, the Board
does not codify the scope of issues for which a firm could request
reconsideration of its stress capital buffer requirement. Additionally,
the Board anticipates that the public input process for stress test
models and scenarios will provide an appropriate and effective avenue
for firms and the public to provide feedback on aspects of the stress
test program that apply to each firm's stress test results, which will
help ensure the consistency and fairness of the stress testing program.
---------------------------------------------------------------------------
\72\ 12 CFR 225.8(i)(3)(ii), 12 CFR 238.170(i)(3)(ii).
---------------------------------------------------------------------------
With respect to additional disclosures or timelines related to the
Board's reconsideration request review process, the Board considered
the comments and its experience administering the reconsideration
request process. At this time, the Board is not adopting additional
changes to this process, which effectively balances interests in
transparency with the Board's need to handle confidential materials
[[Page 62893]]
appropriately and conduct a fair and efficient stress capital buffer
determination process for each firm within the constraints of the
annual stress test cycle. Under the Board's rules, the Board notifies
each firm of the Board's decision to affirm or modify the firm's
preliminary stress capital buffer requirement within 30 calendar days
of receipt of the reconsideration request.\73\ Typically, the Board
responds to the firm through a letter; in the past, a version of the
letter that redacts confidential supervisory information has also
typically been released publicly with a press release. To preserve
confidentiality and flexibility, the Board is not making additional
changes to the reconsideration process or disclosures at this time
beyond extending the window for submission of reconsideration requests.
---------------------------------------------------------------------------
\73\ 12 CFR 225.8(i)(5), 12 CFR 238.170(i)(4).
---------------------------------------------------------------------------
Additionally, the Board considered a comment that suggested that
the Board should define criteria for granting an informal hearing.
Under the Board's stress test rules, a request for reconsideration may
include a request for an informal hearing on the firm's request for
reconsideration; the Board may, in its sole discretion, order an
informal hearing if the Board finds that a hearing is appropriate or
necessary to resolve disputes regarding material issues of fact.\74\
Given the wide range of reasons why a firm may request reconsideration
and what information such a request could encompass, establishing a set
criteria could narrow the scope of bases for granting an informal
hearing. As a result, the Board is not defining criteria for granting
an informal hearing.
---------------------------------------------------------------------------
\74\ 12 CFR 225.8(i)(3)(ii); 12 CFR 225.8(i)(4); 12 CFR
238.170(i)(3)(ii); 12 CFR 238.170(i)(4).
---------------------------------------------------------------------------
III. Revisions to the Stress Testing Policy Statement
Under the proposal, the Board would have made changes to the Stress
Testing Policy Statement to (i) amend the section related to disclosure
of information related to the stress test; and (ii) to align the Stress
Testing Policy Statement with the proposed enhanced disclosure process.
The Board is adopting these changes largely as proposed, with
adjustments as described below.
A. Supervisory Stress Test Results Disclosures
To provide additional transparency, the Board proposed to revise
the Stress Testing Policy Statement to clarify that the Board will
generally disclose information directly to a firm about the firm's
supervisory stress test results that is not available to the broader
public, so long as the Board discloses similar information to the other
firms participating in a given stress test cycle. In the proposal, the
Board explained that, for example, the Board may provide a firm its
common equity tier 1 capital ratio during all quarters of the
projection horizon. Providing firm-specific results directly to the
affected firms even when that information is not disclosed to the
broader public was expected to allow firms to better understand their
results while preventing potentially sensitive information about a firm
from being shared with competitors. Under the proposal, the Board would
have continued to disclose the supervisory stress test results to the
public.
The Board received three comments suggesting that the Board codify
a requirement that the Board transmit certain non-public information to
firms in their results disclosures, while another commenter also
suggested that the Board codify the type of information that the Board
provides to firms when transmitting the firms' results. In particular,
this commenter suggested that the Board provide firms with a firm-
specific, granular breakdown of projections and a quarter-by-quarter
view of the results. The commenter stated that this disclosure should,
at a minimum, be similar to the Board's disclosure of aggregate stress
test results related to the 2025 stress test.\75\ Two commenters stated
that the disclosures should include model-level impacts to the firm
from any model changes that are significant to a specific firm, as well
as model adjustments, such as overlays, including the rationale for any
adjustments.
---------------------------------------------------------------------------
\75\ See Board, 2025 Detailed Nine Quarter Paths, available at
<a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>; see also Board, 2025 Detailed Hypothetical Nine Quarter
Paths Under Proposed Models, available at <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>.
---------------------------------------------------------------------------
One commenter further recommended that the Board provide firms with
more model details in private disclosures, such as the firm-specific
fixed effects for applicable models. Another commenter had a similar
sentiment, stating that the Board should provide firms with more
information about projections and quarter-by-quarter results of
component models (e.g., noninterest income), as opposed to projections
and results of broader modeling areas (e.g., total pre-provision net
revenue). These commenters explained that these disclosures and
processes would improve firms' understanding of the Board's modeling
methodology and the firms' results, which would therefore improve
firms' capital planning.
The Board is finalizing this aspect of the proposal without
changes. The Board's current approach is flexible and enables the Board
to tailor its firm-specific results disclosures to changes in the
stress test over time. Establishing detailed requirements for firm-
specific results disclosures could constrain the Board's ability to
provide detailed disclosures or change the format of the disclosures
over time. Additionally, the Board recognizes that increasing the
granularity of firm-specific disclosures within the annual stress test
cycle would proportionally increase the operational burden and
complexity of administering the stress test, particularly within the
compressed time available to the Board to conduct the stress test.
Within each cycle, the Board aims to provide results that balance these
challenges with the benefits of additional disclosures, while ensuring
consistency in results reporting so that firm-specific results would
not advantage individual firms. As a result, the Board is not
implementing a change to the Board's stress test rules to require a
specific format or contents for firm-specific results disclosures.
B. Other Revisions to the Stress Testing Policy Statement
In addition, the Board proposed to revise the Stress Testing Policy
Statement to align it with the proposed enhanced disclosure process,
such as to reflect the model disclosure and public input process for
material model changes.
The Board did not receive comments on this aspect of the proposal.
Other comments related to the proposed enhanced disclosure process are
addressed in Sections II of this Supplementary Information.
The Board is finalizing this aspect of the proposal without
changes.
Separately, two commenters provided their views on the Board's
``flat balance sheet'' assumption, which is described in the Board's
Stress Testing Policy Statement. One commenter asserted that the
assumption distorts estimated capital levels under stress, and
recommended that the Board's projections should instead allow for
balance sheet growth. Another commenter stated that this assumption is
overly simplified, unsupported by empirical evidence, and leads to
higher borrowing costs and reduced credit availability for consumers.
The Board did not propose to adjust this assumption in the proposal
and the Board is not adopting changes to the flat
[[Page 62894]]
balance sheet assumption as part of this final rule. The existing
balance sheet assumption aligns with the Board's principles of
simplicity, as well as consistency and comparability, and also ensures
that firms do not reduce the supply of credit under a stress scenario.
IV. Revisions to the FR Y-14A/Q/M
To reduce regulatory reporting burden, support the proposed model
changes, and improve risk capture, the Board proposed to adopt several
revisions to the FR Y-14A/Q/M. To reduce regulatory reporting burden,
the Board proposed to remove items and documentation requirements that
are no longer needed to conduct the supervisory stress test. These
revisions, as well as other revisions incorporating feedback from
public comments, are described in this Section of this Supplementary
Information.
Commenters broadly supported the proposed revisions to the FR Y-14.
Commenters also recommended that additional items be added to the FR Y-
14 reports to support suggested changes to the models, as well as
recommended areas that could be further streamlined. After considering
these comments, the Board is adopting the revisions largely as
proposed, and it is also adopting other changes to the FR Y-14 reports
following consideration of these comments, as described below and in
the Board's 2027 Model Review of Comments and Summary of Changes,
available on the Board's website.\76\
---------------------------------------------------------------------------
\76\ The documentation is available on the Board's website. See
Board, 2027 Model Review of Comments and Summary of Changes, <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2027.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2027.htm</a>.
---------------------------------------------------------------------------
A. FR Y-14 Supporting Documentation
FR Y-14A
To ensure that the FR Y-14A requirements do not capture information
that is no longer needed and to reduce reporting burden, the proposal
would have removed Appendix A ``Supporting Documentation'' from the FR
Y-14A report. Commenters supported this proposed removal as it would
decrease reporting burden and requested that the Board clarify response
times for potential additional requests from supervisors during the
annual capital plan review.
In connection with the supervisory review of capital plans, recent
practice has been to communicate the focus of each year's review and
anticipated targeted required information in detail through examination
first-day letters prior to the submission date. This process is
intended to minimize follow-up requests after the submission date, and
supervisors tailor the suggested turnaround times based on the size and
nature of the request. In addition, supervisors may incorporate input
from supervised firms on the nature and timing of large follow-up
requests, as appropriate. With this clarification, the final rule
removes Appendix A from the FR Y-14A.
FR Y-14Q
To streamline FR Y-14Q, Schedule L (Counterparty) and reduce
reporting burden, the proposal would have replaced the existing
Schedule L supporting documentation with a more limited set of
questions that is relevant for supervisors to assess Schedule L data.
Similarly, the proposal would have introduced supporting documentation
for FR Y-14Q, Schedule F (Trading) that includes five questions related
to a firm's trading projections and Schedule F submissions.
Commenters opposed these changes, as they believe they would
significantly increase reporting burden. Additionally, commenters
stated that Schedule F collects information on firms' trading
exposures, not trading projections, so it would not be appropriate to
collect information on projections in connection with Schedule F.
Finally, to reduce reporting burden around the timing of FR Y-14Q
submissions, commenters recommended that, if adopted, the Schedule L
supporting documentation be due at least 30 days after the submission
of data.
The Board recognizes that Schedule F does not collect projection
data, and the final notice does not adopt the Schedule F supporting
documentation requirement, though, supervisors may request additional
information from firms to better understand their trading exposures and
projections. However, the underlying methodology for stressed
counterparty data is necessary to understand firms' Schedule L
submissions, so the final notice adopts a revised Schedule L supporting
documentation requirement. To be responsive to the commenters' burden
concerns, the final notice streamlines the supporting documentation
requirement by removing or simplifying questions, and by offering
additional time to provide responses to certain requests, where
appropriate.
B. Collection of Mailing Address Information
The proposal would have removed item 6 (Mailing Stress Address),
item 7 (Mailing City), item 8 (Mailing State), and item 9 (Mailing Zip
Code) from FR Y-14M, Schedule C (Address Matching). Commenters
supported these proposed removals and asked that the Board retire the
entire Schedule C asserting that it does not provide unique
information. The final notice removes these mailing address items from
Schedule C but does not implement further changes, as the schedule
collects important information that is not available elsewhere, such as
property address data. This information is needed to match junior and
senior loans that use the same collateral.
C. Private Equity
The proposal would have revised FR Y-14Q, Schedule F.24 (Private
Equity) in four ways: (1) to have private equity reported as of
December 31, (2) to have carry values reported net of embedded goodwill
or investments in the capital of unconsolidated financial institutions
that are deducted from CET1 capital, (3) to collect data on private
equity hedges, and (4) to introduce a materiality threshold for
reporting private equity exposures that aligns with other banking book
portfolios.
Commenters suggested that the Board modify certain aspects of the
proposed private equity revisions to clarify the instructions or
simplify reporting. For example, commenters requested the Board clarify
how to define a material private equity portfolio, add items to capture
capital deduction items associated with private equity separately
instead of reporting carrying value offset of these deductions, revise
the instructions to reflect the capital deduction thresholds based on
those applicable to the reporting firm, and introduce a separate
version of Schedule F to capture private equity exposures and their
associated hedges. As these recommendations would simplify reporting
and not impact the Board's ability to model private equity losses, the
final notice incorporates revisions based on these comments. Finally,
as proposed, the Board is revising Schedule F.24 to be reported as of
quarter-end for each quarter, instead of the GMS as-of date for the
fourth quarter submission.
D. Hedges
The proposal would have revised Schedule F, which is currently
subject to a materiality threshold, to capture data on hedges from any
firms with reportable hedges. As proposed, firms, including those not
required to submit Schedule F, could submit a version of Schedule F to
report hedges but would not be required to do so. Commenters requested
that the Board clarify the expectation of when hedges are to be
[[Page 62895]]
reported on Schedule F, asserting that the language in the proposed
instructions was unclear. To provide clarity, the final notice revises
the instructions to indicate that submissions of Schedule F for hedges
are optional except that, if a firm chooses to report a given hedge
type (for example ``AL Hedges''), then all relevant worksheets within
Schedule F must be reported with respect to that hedge type.
Additionally, the final notice clarifies that once that hedge type has
been reported for a given reporting quarter, it must be reported for
each subsequent quarter.
Additionally, to improve the risk capture of the supervisory stress
test by incorporating the effects of additional hedges, the proposal
would have revised FR Y-14Q, Schedule B.2 (Investment Securities with
Designated Accounting Hedges) to capture all qualified accounting
hedges. The proposal would have also implemented a new schedule to more
comprehensively map hedging relationships (FR Y-14Q, Schedule B.3--
``Investment Securities with Designated Accounting Hedge Mapping'').
Commenters recommended various changes to Schedule B, including
expanding the scope of reportable hedges on Schedule B.2 to capture all
economic hedges, adding a clean present value field to Schedule B.2,
and introducing a new sub-schedule to better map long-term debt/
borrowings.
To improve and clarify the reporting of hedges, the final notice
largely incorporates these recommended changes into the Schedule B
instructions. However, the Board has determined that a dedicated sub-
schedule for long-term debt/borrowings is not needed at this time.
These revisions will enable the Board to better assess firm hedges.
E. Exchange Traded Funds
To ensure consistent reporting, the proposal would have clarified
Schedule F instructions such that all exchange traded funds (ETFs)
would be reported in the Schedule F worksheet that corresponds to the
underlying asset class and risk exposure. One commenter stated that it
is not practical to decompose all positions in funds, including ETFs,
and recommended that firms be allowed to treat non-decomposed funds as
a single name equity reported in the equity worksheet.
The Board is cognizant of reporting burden; however, it is
important that exposures are reported consistently and based on their
underlying risk. Therefore, the final notice adopts the proposed
instructional clarification. However, to address the commenter's
concern, the final instructions indicate that reporting can be based on
the primary underlying asset class and risk exposure, if decomposition
is not possible.
F. Credit Card Revenue and Loss Sharing Agreements
The proposal solicited public comment on two versions of a credit
card revenue and loss sharing (RLSA) collection on FR Y-14M, Schedule D
(Credit Card): one that would have captured portfolio-level details and
one that would have captured agreement-level details. Commenters
supported the portfolio-level approach, asserting it would increase
standardization across firms while providing the Board with
appropriately granular information. Commenters also recommended
additional changes such as clarifying certain items, introducing a
materiality threshold, and adding new items. Additionally, one
commenter requested that firms be provided 12 months to implement the
necessary reporting system changes.
As discussed in the Retail section of the Review of Comments
documentation, the Board has determined that portfolio-level, rather
than agreement-level, reporting is appropriate for collecting
information on RLSAs and has adopted the proposed portfolio-level
approach, with certain adjustments in response to comments.
To align with the final PPNR models that rely on data reported on
FR Y-14Q, Schedule G (PPNR), the Board has removed items from FR Y-14M,
Schedule D.3 that capture data associated with RLSA payments and added
new items to FR Y-14Q, Schedule G to collect RLSA payment amounts that
are reflected in interest income, noninterest income, and noninterest
expense. For consistency between reports, the Board is also adding
these items to FR Y-14A, Schedule A.7.a (PPNR Projections) and Schedule
A.7.b (PPNR Net Interest Income), as applicable. Additionally, the
Board has clarified Schedule D.3 to implement consistency in charge-off
and recovery reporting and firm accounting practices. To avoid imposing
reporting burden on firms with small RLSA balances, the Board has
implemented a materiality threshold for Schedule D.3 such that firms
that either report $5 billion or more in total partnership agreement
balances or have total partnership agreement balances exceeding 5
percent of the firm's total domestic consumer bank card balances at
quarter-end must report Schedule D.3. To further reduce reporting
burden, the Board has revised the cadence of Schedule D.3 reporting
such that it is submitted quarterly instead of monthly. Finally, the
Board is adopting the RLSA reporting revisions for the December 31,
2027, as-of date to provide firms the time necessary to submit accurate
data.
G. Stress Test Date Changes
To align with proposed changes to the stress test calendar, the
proposal would have revised the FR Y-14A jump-off date to be September
30 and modified the submissions of FR Y-14 such that, for the quarter
containing the GMS component as-of date, the submission of data
associated with the GMS component would be submitted as of the date
instead of quarter-end. As discussed in Section II.E of this
Supplementary Information, the Board is not revising the FR Y-14A jump-
off date.
Therefore, the final notice does not alter the current December 31
jump-off date for the FR Y-14A. Additionally, as discussed in Section
II.E of this Supplementary Information, the final rule adopts an as-of
date window for the GMS component of April 1 to December 31 of the year
preceding the stress test. Consistent with this expanded as-of date
window, the final notice revises the FR Y-14 instructions such that,
for the quarter containing the GMS component as-of date, the submission
of data associated with the GMS component is submitted as of that date,
instead of quarter-end.
[[Page 62896]]
Finally, as discussed in Section II.E of this Supplementary
Information, the Board is adopting several changes to dates in the
annual stress test cycle. For example, the due date for annual capital
plan submissions and for applicable firms to conduct company-run stress
tests is April 30, instead of April 5. However, the timely submission
of certain FR Y-14 data is critical to ensure that the stress test
results are final by June 30. Specifically, the stressed submission of
FR Y-14Q, Schedule L (Counterparty) and alternative starting values for
certain capital deduction items on FR Y-14A, Schedule A.1.d (Capital)
are necessary to calculate projected losses under the GMS component.
Therefore, the Board is retaining an April 5 due date for these items
but revising the due date of the remaining FR Y-14A data to April 30,
consistent with the revised due date of firms' capital plans and the
date to conduct a company-run stress test.
H. Other FR Y-14 Revisions and Comments
Comments on Further Reporting Reductions
As described above, the proposal included revisions that would have
reduced reporting burden. Commenters provided several recommendations
as to how this burden could be further reduced. For example, one
commenter asked that the Board conduct a line-by-line inventory of all
FR Y-14 items and explain which are used in the supervisory models or
are necessary for supervision and regulation, or to otherwise justify
collecting that data. The commenter suggested that any items not on
either list be retired. The commenter recommended that the Board
consider developing materiality frameworks for firms to consider for
reporting the FR Y-14Q and FR Y-14M reports. The commenter suggested
that collecting data on only material items would reduce burden on
firms. Alternatively, the commenter suggested that the Board identify
critical data elements and make the non-critical elements optional or
best efforts. Another commenter recommended that the Board reconsider
the reporting frequency for certain areas, such as the FR Y-14M report,
and consider limiting historical data requirements for firms newly
subject to reporting FR Y-14Q schedules.
The Board is cognizant of regulatory reporting burden and has
already undertaken significant steps to reduce reporting burden by
retiring supporting documentation, line items that are no longer
necessary, and historical data requirements that are no longer
necessary. Additionally, while an item may not be an input to the
stress test models, it is important that the Board receive fulsome data
to support model monitoring or other supervisory activities. Further, a
materiality framework or reporting on a best efforts basis could result
in critical data not being reported, which could hinder supervisory
activities. Therefore, the Board is not removing additional items from
the FR Y-14 at this time. The Board will continue to assess whether it
is appropriate to retire select items or requirements that are no
longer necessary.
Comments on Reporting in Connection With Modeling Suggestions
Additionally, in response to the proposed models, commenters
recommended that the Board improve aspects of the models, and some of
these recommendations would require the collection of additional data.
Further, commenters recommended that specific schedules be modified or
clarified to improve reporting. Comments that suggested additional data
collections to support commenter recommendations to revise model
specifications or improve reporting are discussed in the Board's 2027
Model Review of Comments and Summary of Changes, available on the
Board's website.\77\
---------------------------------------------------------------------------
\77\ The documentation is available on the Board's website. See
Board, 2027 Model Review of Comments and Summary of Changes, <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2027.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2027.htm</a>.
---------------------------------------------------------------------------
V. Changes to the Stress Test Modeling Framework
The Board proposed to use the models described in the documents
posted on the Board's website to generate results for the 2026
supervisory stress test. Included in these descriptions were some model
specifications that were not used to conduct the 2025 supervisory
stress test but were proposed to be used for the 2026 supervisory
stress test. Section V.A of this Supplementary Information discussed
the model changes adopted at this time and Section V.B of this
Supplementary Information provides an updated analysis of the potential
effects of the changes, as compared to the proposal. Based on this
analysis, implementing the final model changes and final revisions to
the GMS scenario design in the 2024, 2025, and 2026 stress tests would
have, independent of other factors, increased the aggregate projected
CET1 stress ratio, on average, by 17 basis points.\78\
---------------------------------------------------------------------------
\78\ The Board is separately finalizing the Volatility Proposal
in order to reduce the volatility of stress capital buffer
requirements. Section II of that final rule's preamble includes an
estimate of its impact on required capital. See [Federal Register
notice for Volatility final rule, section II].
---------------------------------------------------------------------------
A. Changes to Stress Test Models
The Board proposed a series of changes to the Board's stress test
models in the proposal, which were described in the proposal and in
greater detail in the documentation published on the Board's
website.\79\ The Board received many comments on the proposed changes
to stress test models described in the proposal. As described above in
Section I.F of this Supplementary Information, commenters provided a
mix of comments that expressed general support for the proposed models,
as well as suggestions for additional changes to these proposed models,
including many conceptual and technical adjustments. The Board
considered these comments and addressed them in the Board's Review of
Comments, available on the Board's website.\80\
---------------------------------------------------------------------------
\79\ Board, Model Changes 2025 to 2026 (Oct. 24, 2025),
available at <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>.
\80\ The documentation is available on the Board's website. See
Board, 2027 Model Review of Comments and Summary of Changes, <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2027.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2027.htm</a>.
---------------------------------------------------------------------------
With respect to the credit risk models, the Board proposed to
change how it uses geography in scenario variables (First Lien, Home
Equity, Credit Cards, Auto, and Commercial Real Estate Models); change
how it treats foreclosures under judicial supervision (First Lien and
Home Equity Models); change how it calculates loss given default for
international loans (Commercial Real Estate and Corporate Models);
change how it includes losses attributable to accrued interest and
carrying costs (First Lien and Home Equity Models); change how it uses
multipliers in the Provisions Model; revise the mortgage loss given
default model in the First Lien Model; revise the bank card model in
the Credit Card Model; change how it projects losses on auto leases in
the Auto Model; and update the probability of default, loss given
default, and exposure at default components in the Corporate Model. The
Board is finalizing these changes largely as proposed.
[[Page 62897]]
With respect to the market risk models, the Board proposed to
update several of its market risk models for the 2026 stress test,
including to simplify the Yield Curve Model; adjust its process for
projecting credit valuation adjustments for derivative positions in the
Credit Valuation Adjustment Model; lower the loss given default
assumption amount and loan equivalent factor parameter in the Fair
Value Option Model; update and simplify the Securities Model; and
exclude additional counterparties in the Largest Counterparty Default
Model. The Board is also finalizing these changes largely as proposed.
With respect to the net revenue models, the Board proposed an
alternative suite of pre-provision net revenue component models that
depart from the current panel regression-based approach. This
alternative suite was described in the Pre-provision Net Revenue Model
documentation, available at <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>. The Board also proposed to
discontinue the current regression model used to project operational
risk losses and instead project losses with a distributional model.
This alternative model was described in the Operational Risk Model
documentation, also available at <a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>. The Board is finalizing some
of these changes at this time, and is also proposing further changes to
the adopted noninterest income expense model.
---------------------------------------------------------------------------
\81\ See Board, Dodd-Frank Act Stress Tests 2026 (Jun. 2026),
<a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm</a>.
\82\ This analysis used the 2024, 2025, and 2026 scenarios,
respectively, and the same data used for those years' stress tests.
The estimated impact of these changes remains highly sensitive to
the stress test scenario and firm-specific data for each year. In
addition, the estimated impact of the changes to the GMS scenario
design relies on additional counterparty modeling assumptions, since
the historical data alone cannot incorporate these changes. While
the precise impact will vary each year based on stress test
scenarios and specific firm data, Board analysis across a range of
conditions shows that capital requirements should remain essentially
unchanged.
---------------------------------------------------------------------------
The Board received detailed feedback on the proposed model changes
for the 2026 stress test, and on the model documentation as a whole.
The Board has considered these comments and described its rationale for
the final models for the 2027 stress test, as well as additional
proposed changes to the noninterest income expense model for the 2027
stress test, in documentation on the Board's website, available at
<a href="https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2027.htm">https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2027.htm</a>.
B. Analysis of Final Model Changes
This section describes illustrative analysis of how the model
adjustments described above could have affected past stress test
results. As discussed in Section V.A of the SUPPLEMENTARY INFORMATION,
the Board is adopting several model changes in response to public
comments, as well as changes to the GMS scenario design described in
Section II.E of this SUPPLEMENTARY INFORMATION. For example, the final
FVO models would adopt more risk-sensitive loss given default
assumptions for corporate and commercial real estate loans. Similarly,
the pre-provision net revenue models would adopt several revisions,
such as changing the base rate assumption for fixed-rate wholesale
loans in the interest income on loans model and anchoring each firm's
projected efficiency ratio to its own recent experience to better
incorporate business heterogeneity in the noninterest expense model.
All model changes adopted as part of this final notice are discussed in
the model documentation available on the Board's website.\81\
In aggregate, these changes are not expected to materially change
capital requirements for firms subject to the supervisory stress test,
across various stress scenarios and jump-off conditions at the start of
the test. As in the proposal, to illustrate the effect of these model
changes, the Board's analysis estimated the impact of these model
changes on the CET1 stress ratio for a balanced sample of 30 firms
subject to the 2024 stress test, then aggregated the averages.\82\
Using this analysis, table 4 illustrates the potential impact of these
changes for each risk stripe across various stress test scenarios and
jump-off dates. Based on this analysis, the final model changes can be
expected to result in slightly lower projected common equity tier 1
(CET1) capital ratio declines compared to the proposed models, mostly
due to the updated calculation of the valuation allowance for deferred
tax assets to better align with U.S. GAAP accounting practices.
[GRAPHIC] [TIFF OMITTED] TR02OC26.025
[…truncated; see source link]Indexed from Federal Register on October 2, 2026.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.