On October 24, 2025, the Federal Reserve Board issued two proposals to revise its supervisory stress testing framework.

• One proposal (the “Transparency and Public Accountability NPR”) requests comment on (i) the Federal Reserve’s supervisory stress test models and related revisions intended to increase the transparency of its stress test scenario design and (ii) an enhanced disclosure process that would include public comment on material model changes and the annual stress test scenarios.^[1]
• A separate proposal (the “2026 Scenarios NPR”) requests comment on the Federal Reserve’s proposed scenarios for its 2026 supervisory stress tests and the models used to generate the scenarios, which are designed based on proposed revisions to the Federal Reserve’s Scenario Design Policy Statement.^[2]
• In addition, a voluminous set of technical-level detail on the content of the stress test models and scenarios was publicly released on the Federal Reserve Board’s website in connection with the proposals. This material (which is referenced and hyperlinked in the proposals) includes comprehensive model documentation, the proposed scenarios for the 2026 supervisory stress test and other supporting information.^[3]

The Federal Reserve Board approved the proposals by a vote of 6 to 1, with Governor Barr dissenting.

The Federal Reserve noted that the purpose of the Transparency and Public Accountability NPR “is 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,” which would “further increase transparency and improve public accountability.”^[4]

Background

The Federal Reserve initially conducted a stress test of 19 bank holding companies in 2009 pursuant to its Supervisory Capital Assessment Program, which was designed to estimate losses, revenues and reserves including under an adverse macroeconomic scenario.^[5] Section 165(i) of the Dodd-Frank Wall Street Reform and Consumer Protection Act codified supervisory and company-run stress testing for large bank holding companies in July 2010, with the thresholds for application revised in May 2018 pursuant to Section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act.^[6] When the Federal Reserve adopted its capital plan rule in 2011, it implemented a quantitative and qualitative “pass/fail” objection framework.^[7] The qualitative objection aspect of the stress tests was broadly eliminated in 2019.^[8] In 2020, the Federal Reserve eliminated the quantitative objection framework and adopted the stress capital buffer (“SCB”) requirement.^[9] Under the SCB framework, the stress test results directly factor into a firm’s buffer requirement, which is composed solely of common equity tier 1 (“CET1”) capital.^[10] The Federal Reserve’s supervisory stress test rules and capital planning requirements, including the SCB requirement, currently apply to top-tier U.S. bank holding companies, U.S. intermediate holding companies of foreign banking organizations and covered savings and loan holding companies with average total consolidated assets of at least $100 billion.

Over the years, and in particular following the adoption of the SCB, the stress testing framework has been criticized on the basis that the underlying scenarios and models involve “legislative rules” that should have been and were not subject to notice-and-comment procedures under the Administrative Procedure Act.^[11] In December 2024, industry trade associations commenced litigation that sought, among other things, notice-and-comment rulemaking procedures with respect to the stress test scenarios and models.^[12]

The Federal Reserve had previewed its intent to propose changes to several aspects of its stress testing framework in a December 2024 press release.^[13] In that release, the Federal Reserve noted that it intended to disclose and seek public comment on “all of the models that determine the hypothetical losses and revenue of banks under stress” and to provide for public comment “on the hypothetical scenarios used annually for the test, before the scenarios are finalized.”^[14] The proposals also were previewed in a joint motion to stay proceedings in connection with the litigation regarding the Federal Reserve’s stress tests,^[15] as well as in a recent speech from Federal Reserve Vice Chair for Supervision Bowman.^[16]

The proposals follow an April 2025 Federal Reserve request for comment that would seek to reduce the volatility of year-over-year changes in regulatory capital requirements resulting from the stress test through the SCB requirement, including averaging the SCB requirement over a two-year period.^[17]

Discussion

Under the proposed enhanced disclosure process, the Federal Reserve would:

• Publish the proposed scenarios by October 15 of the calendar year prior to the stress test—with at least a 30-day comment period—and publish the final scenarios by February 15 in each annual stress test cycle.^[18]
• Publish comprehensive model documentation by May 15 of the year in which the stress test is performed, identify model changes and respond to public comment on material model changes^[19] before their incorporation into the Federal Reserve’s stress tests.^[20] Materiality would be based on a change of at least (i) 20 basis points in the projected post-stress CET1 ratio of any participating firm or (ii) 10 basis points in the average of the projected post-stress CET1 ratio of all participating firms.^[21]
• Modify the “jump-off date” (i.e., the “as-of” date) for supervisory and company-run stress tests from December 31 to September 30 (i.e., one quarter earlier) to reflect the need to carry out the proposed public comment process^[22] and make conforming changes to the stress testing and capital plan rules, including related revisions to the quarters used for the dividend add-on component of the SCB requirement.^[23]
• Amend the Stress Testing Policy Statement to clarify that the Federal Reserve will generally disclose to a participating firm non-public information regarding its supervisory stress test results to the extent that the Federal Reserve discloses similar information to other participating firms, even if such information is not included in disclosures to the public at large.^[24]

With respect to stress test scenario design:

• The Federal Reserve would amend its Policy Statement on the Scenario Design Framework for Stress Testing. Among other changes, the revised Policy Statement would update existing “guides” with respect to the unemployment rate and house prices and establish a “guide” for seven additional variables used in constructing the supervisory severely adverse scenario.^[25] The “guides” inform the Federal Reserve’s determination regarding the calibration of these variables in connection with the supervisory severely adverse scenario released each year.
• The Federal Reserve would widen the range of dates it may select as the “as-of” date for the global market shock (“GMS”) component of the stress tests to cover a one-year period and reduce the length of the liquidity horizons for the GMS, which are currently three, six or 12 months, to one month for liquid asset classes and three months for illiquid asset classes.^[26]The number of modeled risk factors used in the GMS would be reduced from over 20,000 to approximately 2,300.^[27]
• Certain sovereign counterparties would be excluded from consideration in the largest counterparty default (“LCD”) component based on a firm’s internal ratings methodology.^[28]

The Federal Reserve proposes to implement changes to its stress testing models for the 2026 stress test, which are summarized on the Federal Reserve’s website, including a new proposed model for pre-provision net revenue.^[29]

The Federal Reserve also would revise the FR Y-14 forms to remove items and supporting documentation requests that would no longer be needed and collect additional data to support the models and improve risk capture. The Federal Reserve estimates that the removal of the supporting documentation requirement is expected to reduce the submitted documentation by over 10,000 pages for each firm on average subject to the requirement.^[30]

The Federal Reserve estimates that the proposed model changes and revisions to the GMS in the 2024 and 2025 stress tests would have increased the aggregate projected post-stress CET1 ratio for the participating banks on average by 29 basis points, which would be equivalent to a reduction in SCB requirements of approximately 23 basis points or approximately 2.2 percent of current required capital.^[31] For U.S. global systemically important banks, the Federal Reserve estimates a decline of 25 basis points in SCB requirements.^[32]

The Transparency and Public Accountability NPR stated that the Federal Reserve “is also considering the effectiveness of its regulatory capital and capital planning requirements for large firms to ensure they remain cohesive and effective, maintain the resilience of the banking sector, and minimize any unnecessary burden.”^[33]Comments on the Transparency and Public Accountability NPR are due by January 22, 2026. Comments on the 2026 Scenarios NPR are due by December 1, 2025. These comment deadlines are not tied to publication in the Federal Register, and therefore are not affected by the government shutdown.

ENDNOTES

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^[1] Federal Reserve, 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 (Oct. 24, 2025), available at https://www.federalreserve.gov/aboutthefed/boardmeetings/enhanced-transparency-and-public-accountability-proposal-frn.pdf.

^[2] Federal Reserve, Request for Comment on Scenarios for the Board’s 2026 Supervisory Stress Test (Oct. 24, 2025), available athttps://www.federalreserve.gov/aboutthefed/boardmeetings/2026-scenarios-proposal-frn.pdf. The scenarios are available on the Federal Reserve’s website. Federal Reserve, Proposed 2026 Stress Test Scenarios (Oct. 2025), available athttps://www.federalreserve.gov/aboutthefed/boardmeetings/2026-proposed-supervisory-stress-test-scenarios-20251024.pdf.

^[3] Federal Reserve, Dodd-Frank Act Stress Tests 2026, available at https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2026.htm.

^[4] Transparency and Public Accountability NPR, p. 21. As described in the Transparency and Public Accountability NPR, the “stress test models take macroeconomic variables from the Board’s severely adverse scenario and firm data as inputs to produce each firm’s projected capital ratios over a nine-quarter horizon. The 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.” Transparency and Public Accountability NPR, p. 15.

^[5] Federal Reserve, The Supervisory Capital Assessment Program: Design and Implementation (Apr. 24, 2009), available athttps://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20090424a1.pdf; Federal Reserve, The Supervisory Capital Assessment Program: Overview of Results (May 7, 2009), available athttps://www.federalreserve.gov/newsevents/files/bcreg20090507a1.pdf.

^[6] 12 U.S.C. § 5365(i).

^[7] Capital Plans, 76 Fed. Reg. 74,631 (Dec. 1, 2011).

^[8] Federal Reserve, Federal Reserve Board announces it will limit the use of the “qualitative objection” in its Comprehensive Capital Analysis and Review (CCAR) exercise, effective for the 2019 cycle (Mar. 6, 2019), available athttps://www.federalreserve.gov/newsevents/pressreleases/bcreg20190306b.htm.

^[9] Regulations Q, Y, and YY: Regulatory Capital, Capital Plan, and Stress Test Rules, 85 Fed. Reg. 15,576 (Mar. 18, 2020).

^[10] The SCB requirement integrates the results of the supervisory stress test into the regulatory capital framework and is calculated as the difference between a firm’s starting and lowest projected CET1 capital ratio under the supervisory severely adverse scenario plus four quarters of planned common stock dividends, expressed as a percentage of risk-weighted assets, subject to a floor of 2.5 percent. 12 C.F.R. § 225.8(f), § 238.170(f).

^[11] See, e.g., Randal K. Quarles, SIFMA Basel III Endgame Roundtable Transcript, p. 34 (July 12, 2023), available athttps://www.sifma.org/wp-content/uploads/2023/07/SIFMA-Basel-III-Endgame-Roundtable-July-2023-Transcript.pdf (“But I have become very convinced that the way the stress test is conducted now is a violation of the Administrative Procedure Act. It is illegal.”).

^[12] Bank Policy Institute et al. v. Board of Governors of the Federal Reserve System, Case No. 2:24-cv-04300 (S.D. Ohio) (Dec. 24, 2024).

^[13] Federal Reserve, Due to evolving legal landscape & changes in the framework of administrative law, Federal Reserve Board will soon seek public comment on significant changes to improve transparency of bank stress tests & reduce volatility of resulting capital requirements (Dec. 23, 2024), available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20241223a.htm.

^[14] See id. See also Federal Reserve, Federal Reserve Board requests comment on a proposal to reduce the volatility of the capital requirements stemming from the Board’s annual stress tests (Apr. 17, 2025), available athttps://www.federalreserve.gov/newsevents/pressreleases/bcreg20250417a.htm (“Later this year, the Board intends to propose additional changes to improve the transparency of the stress test. Those changes include disclosing and seeking public comment on the models that determine the hypothetical losses and revenue of banks under stress, and ensuring that the public can comment on the hypothetical scenarios used for the annual stress test before the scenarios are finalized.”).

^[15] Bank Policy Institute et al. v. Board of Governors of the Federal Reserve System, Joint Motion to Stay Proceedings, Case No. 2:24-cv-04300 (S.D. Ohio) (filed Sept. 30, 2025).

^[16] Michelle W. Bowman, Welcome Remarks at 2025 Federal Reserve Stress Testing Research Conference (Oct. 16, 2025), available at https://www.federalreserve.gov/newsevents/speech/files/bowman20251016a.pdf.

^[17] Modifications to the Capital Plan Rule and Stress Capital Buffer Requirement, 90 Fed. Reg. 16,843 (Apr. 22, 2025). The April 2025 proposal also would extend the annual effective date of the SCB from October 1 of the calendar year of the stress test to January 1 of the following calendar year.

^[18] Transparency and Public Accountability NPR, p. 51.

^[19] A “model change” would be defined as “the introduction of a new model or a conceptual change to an existing model.” A “conceptual change” to an existing model “would include changes to model assumptions, incorporation of a new statistical technique to estimate loss, or the addition or deletion of any model components or sub-components that currently inform a firm’s stress capital buffer requirement.”  Transparency and Public Accountability NPR, p. 45.

^[20] Transparency and Public Accountability NPR, p. 47.

^[21] Transparency and Public Accountability NPR, p. 48.

^[22] Transparency and Public Accountability NPR, p. 58.

^[23] Transparency and Public Accountability NPR, pp. 62-64.

^[24] Transparency and Public Accountability NPR, pp. 55-56. The current Stress Testing Policy Statement is codified in 12 C.F.R. part 252, Appendix B.

^[25] The current Policy Statement on the Scenario Design Framework for Stress Testing is codified in 12 C.F.R. part 252, Appendix A. The seven additional variables are equity prices, the VIX index, 5-year Treasury yields; 10-year Treasury yields; BBB corporate bond yields; mortgage rates; and commercial real estate prices. The “guides” also include certain international scenario values. Transparency and Public Accountability NPR, p. 81.

^[26] Transparency and Public Accountability NPR, pp. 59-61, 218-21. The GMS currently applies to a firm with “significant trading activity,” which is defined as a firm subject to the Federal Reserve’s stress tests that (A) has aggregate trading assets and liabilities of $50 billion or more, or aggregate trading assets and liabilities equal to 10 percent or more of total consolidated assets; and (B) is not a Category IV firm. 12 C.F.R. § 238.143(b)(2)(i), § 252.54(b)(2)(i).

^[27] Transparency and Public Accountability NPR, pp. 221-22.

^[28] Federal Reserve, Supervisory Stress Test Model Documentation Proposed Model Changes for 2026 Stress Test, pp. 27-28 (Oct. 2025), available at https://www.federalreserve.gov/supervisionreg/files/proposed-model-changes-2025-to-2026.pdf. The LCD component broadly requires subject firms to recognize losses associated with the unexpected default of its largest counterparty. 12 C.F.R. part 252, Appendix B, Section 2.5. The LCD component generally applies to firms subject to the GMS as well as to firms with substantial processing and custodial operations.

^[29] Federal Reserve, Supervisory Stress Test Model Documentation Proposed Model Changes for 2026 Stress Test (Oct. 2025), available at https://www.federalreserve.gov/supervisionreg/files/proposed-model-changes-2025-to-2026.pdf. The models are broadly grouped into four categories: credit risk, market risk, net revenue and aggregation. Transparency and Public Accountability NPR, p. 17.

^[30] Federal Reserve, Memo from Staff to the Board of Governors (Oct. 17, 2025), pp. 15-16, available athttps://www.federalreserve.gov/aboutthefed/boardmeetings/stress-tests-transparency-memo-20251024.pdf. A summary of the proposed FR Y-14 revisions is provided in Appendix B to the staff memo.

^[31] Transparency and Public Accountability NPR, pp. 67-68.

^[32] Transparency and Public Accountability NPR, p. 68.

^[33] Transparency and Public Accountability NPR, pp. 5-6.

This post comes to us from Sullivan & Cromwell LLP. It is based on the firm’s memorandum, “Federal Reserve Capital Stress Testing,” dated October 29, 2025, and available here.