Fed opts to keep bank capital buffers steady until 2027 as it mulls stress test tweaks

By Pete Schroeder

WASHINGTON, Feb 4 (Reuters) – The U.S. Federal Reserve announced on Wednesday it would not adjust large bank capital levels during the 2026 stress testing cycle, as the ‍central bank considers several changes to the annual exercise aimed at boosting transparency.

Fed Vice Chair for Supervision Michelle Bowman said large banks’ “stress capital buffers” will instead be revised in 2027, after the Fed has had a chance to identify any shortcomings in the models it uses to test ‌large bank finances against a hypothetical economic downturn. ‌The Fed voted in October to make its testing models open to public feedback, as well as the scenarios they test banks against every year.

“Waiting to calculate new stress capital buffer requirements until we receive public ​feedback will give us the opportunity to correct any deficiencies in our supervisory models based on that feedback,” Bowman said in ‍a statement.

The announcement came as the ​Fed published its scenarios for the 2026 testing cycle, ​which envisioned a steep increase in unemployment, severe market volatility, and ‍a steep decline in asset prices. Last year’s exam found banks were well-positioned to weather a major downturn and continue lending, as their capital levels remained well above regulatory minimums.

Banks had long complained that the central bank’s annual exams were opaque and subjective, ‍particularly since how well each firm performed determined how much capital they would have to set aside to guard against potential losses in the ‍coming year. The ‍Fed’s decision to make its testing models public, ​and responsive to public feedback, was a major win ​for ⁠the industry.

Fed Governor Michael Barr, who previously served ‌as the Fed’s top regulatory official under President Joe Biden, dissented from Wednesday’s decision, arguing that freezing bank capital levels could make the stress tests “stagnate,” and instead the Fed should set capital on the most recent measure of banks’ risks via the upcoming exam.

(Reporting by Pete Schroeder; Editing ⁠by Anna Driver)