Banking and Finance Law Daily Wrap Up, FINANCIAL STABILITY—Fed finalizes stress test transparency and volatility rules as Barr objects, (Sep 30, 2026)

By Shashi Kant, B.A. LL.B., LL.M.

The Fed adopted two final stress test rules and proposed a revised noninterest income model for the 2027 stress test.

The Federal Reserve Board has finalized two rules that require annual public input on its supervisory stress test models and scenarios and that average stress test results over two years when setting stress capital buffer requirements, according to a Fed press release. The Fed also requested comment on a revised noninterest income model for the 2027 stress test. Governor Michael S. Barr said he cannot support the transparency rule. Governor Lisa D. Cook said she is optimistic that the framework preserves the Fed’s ability to run an effective stress test. The Fed proposed the transparency changes in October 2025 (Banking and Finance Law Daily, Oct. 27, 2025). According to a Fed staff memo, the volatility rule adopts a proposal the Fed issued in April 2025.

Public input on models and scenarios. The first final rule requires the Fed to invite public input each year on the stress test scenarios and on any material model changes, the press release states. Beginning with the 2028 stress test, the Fed will propose material model changes by August 31 of the year before the test, with a comment period of at least 30 days, according to the memo. The Fed said the final rule also adopts the models for the 2027 stress test, updates the scenario design framework, and adjusts the stress test calendar. According to the memo, the final rule keeps December 31 as the stress test jump-off date in response to commenter concerns about year-end processes.

Global market shock. Banks with large trading books will be tested against two global market shock components each year, the press release states. The Fed said it will use the shock that produces the largest losses for each firm to calculate that firm’s results. The memo states that the range of as-of dates for the global market shock will expand from five months to nine months, running from April 1 to December 31 of the year before the test.

Averaging results. The second final rule requires the Fed to average the results from the two most recent annual stress tests when calculating stress capital buffer requirements for firms tested in both years, the press release states. According to the memo, averaging applies starting with the stress capital buffer requirement effective Jan. 1, 2029, so that only models incorporating public input are used. The memo states that the rule also moves the effective date of the stress capital buffer requirement from October 1 to January 1, giving firms three additional months to comply.

Noninterest income proposal. The proposal seeks comment on a revised noninterest income model that would better capture differences in how banks generate fee income, the Fed said. If adopted, the revised model would replace the current model that projects each bank’s fee income under stress, according to the press release. According to the memo, the final package adopts an interim model for the 2027 stress test, which the proposed model would replace if it is finalized in time. Comments are due 60 days after publication in theFederal Register, the Fed said.

Capital impact. The Fed said the changes are likely to reduce year-over-year volatility in capital requirements by approximately 50 percent. According to the Fed, the changes are not expected to materially affect aggregate capital requirements. The memo states that, relative to the 2024, 2025, and 2026 stress test cycles, the adopted and proposed changes would have reduced aggregate stress capital buffer requirements by about 1 percent of required common equity tier 1 capital. Vice Chair for Supervision Michelle W. Bowman said the changes preserve the stress test’s resilience by ensuring that it is “transparent, granular, and risk-sensitive.”

Barr’s objections. Barr said he cannot support the final rule, largely for the reasons in his dissent at the proposal stage. He said the rule will, over time, reduce the “dynamism, rigor, conservatism, and credibility” of the stress test. According to Barr, disclosing the models and holding annual comment processes will make the stress test less responsive to emerging risks. Barr said fixed models will allow banks to optimize their balance sheets to the test rather than focus on underlying risk. Barr said he supports using multiple scenarios for the global market shock and taking the larger of the losses. He also said the changes add to other measures, including reduced global systemically important bank surcharges and reduced leverage ratios, that are reducing the resilience of the financial system.

Cook’s view. Cook said she is optimistic that the final framework preserves the Fed’s capacity to administer a trustworthy and effective stress testing regime. According to Cook, the framework includes design features aimed at reducing the potential for “gaming” behavior. Cook said the Fed may need to consider other options if stress tests become less severe or overly predictable over time. She also said she sees significant benefits in exploratory stress scenarios that would not directly affect regulatory capital.

Related materials. The Fed also released a review of comments and summary of changes to the proposed stress test models, a summary of stress test changes and effective dates, and its Dodd-Frank Act Stress Tests 2027 webpage.

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