September 18, 2026 The Final Chapter on Modernizing Bank Regulatory Stress Testing Vice Chair for Supervision Michelle W. Bowman At the Luncheon of the Lord Mayor City of London at Mansion House, London, United Kingdom Share --> --> --> --> --> --> Watch Live Thank you for the invitation to join you today. 1 It is especially fitting to gather in the majestic and historic surroundings of Mansion House—a monumental building that has long stood at the center of London's civic and financial life. Its setting reminds us that banking has always depended on public confidence as much as on private enterprise. Situated opposite the Bank of England and beside the Royal Exchange, it lies at the physical heart of a financial system shaped over centuries by the interaction of markets, regulatory bodies, and government. It is an honor and a pleasure to join you to discuss our efforts to modernize U.S. banking regulations and supervision. Today, my remarks will highlight our work to enhance and improve the bank regulatory stress test framework. This framework creates a legally sound regulatory process for setting capital requirements and enhancing supervision. The program I will discuss today represents the culmination of a multiyear effort to address fundamental flaws in how we have approached bank capital requirements and supervision since the introduction of the stress testing program following the financial crisis. In an effort to address legal challenges and make overall improvements to this framework, the Federal Reserve has incorporated lessons learned from the outset of this program. Some of these have been difficult lessons, especially for an institution like the Federal Reserve Board. The process of learning and incorporating these lessons is absolutely critical to the legitimacy of the stress test results. For example, we have addressed the imperative of process and model transparency, public accountability, supportable and repeatable outcomes, and proactive regulatory action. In finalizing these reforms, we will finally close the book on an opaque and unnecessarily unpredictable framework. We can soon begin anew with a framework that complies with U.S. administrative procedure laws, that better promotes the stability of our financial system, and that better ensures the safety and soundness of our largest banks. In the coming weeks, the Federal Reserve Board will consider final revisions to the Board's stress testing framework. These changes will improve transparency and public accountability, strengthen the reliability and accuracy of the models, and reduce the volatility of the capital requirements flowing from the annual stress test results. In the U.S. framework, the Board incorporates forward-looking supervisory stress testing into large bank capital requirements through the stress capital buffer (SCB). In addition, and before the end of this year, I expect the Board to finalize reforms to risk-based capital requirements for large and small banks as well as improvements to the global systemically important bank (GISB) surcharge. In totality, these reforms create a durable and lasting framework to produce capital requirements that are rational, robust, aligned with risk, and transparent. Stress testing is a valuable mechanism for gauging large-bank resilience. As those in this room know, hypothetical scenarios allow the public and our Federal Reserve supervisors to assess whether the nation's largest banks hold sufficient capital to absorb losses and continue lending to households and businesses through times of severe stress. While stress testing is a critical supervisory tool, it is not without flaws. Under my direction, our staff has worked diligently to improve the stress testing framework and its implementation. These enhancements will ensure that the stress testing framework is credible, effective, and fair, with the goal of eliminating opacity and unpredictability. Today, I will describe the new stress testing program that has been subject to public comment and under consideration by the Board over the past 12 months. I will then discuss how these enhancements will ensure that transparent and granular SCB requirements are sensitive to current and potential risks. After reviewing the two outstanding regulatory proposals, I will preview an expanded approach for stress testing in the future. These forward-looking exercises will make stress testing a more effective tool for identifying firm-specific vulnerabilities under various economic and financial scenarios. They will leverage the underlying data from our capital-based stress tests but will be targeted to identify risks and vulnerabilities. Importantly, the results of these forward-looking tests would not affect capital requirements. Instead, the knowledge gained from this exercise will deepen our understanding of exposures to material financial and nonfinancial risks and their resiliency to those risks. The Current Landscape Before diving into the substance of these proposals, let me provide some context. The Board made a public commitment to seek comment on comprehensive changes to the supervisory stress test and incorporate public input as an ongoing feature of the process. In December 2024, the Board committed to the basic contours of these changes, including to disclose and then seek public comment on all models used to determine the hypothetical losses and revenues of the banks subject to the tests. This includes soliciting public comment on changes to the framework that guides the design of the hypothetical scenarios and, beginning with the 2026 stress test, on the hypothetical scenarios themselves. Since its inception, the Board's stress testing program has been broadly criticized for its limited transparency, its unreasonable year-over-year volatility, and the absence of any meaningful appeals process. The Board has been keenly aware of these deficiencies for many years but considered them to be a feature, not a bug. Unfortunately, and even after mounting threats of litigation were realized, the Board did not take meaningful remedial action. Upon my confirmation as Vice Chair for Supervision, I swiftly changed course. Enhancing the Stress Testing Framework Last year, the Board issued two proposals designed to increase the transparency and public accountability of the capital-based stress test while maintaining its dynamism. The existing framework—including the stress test models, scenario design framework, and specific scenarios—is not adequately disclosed or subject to public comment. This lack of transparency can lead to uncertainty for banks in capital planning, potential misalignment of capital requirements with actual risks, and limited public understanding and scrutiny of the stress testing process. In considering the finalization of the rules that underpin the framework, the first is the Enhanced Transparency and Public Accountability final rule. As proposed, this rule requires the Board to publish detailed information on the stress test models and on the scenario design process, resulting in greater transparency and public accountability. Model disclosures will publish the equations, variables, coefficients, underlying assumptions, limitations, and decisionmaking rationale for each model. They will also include alternative model considerations and specific model changes the Board plans to implement for the 2027 stress test. This approach appropriately creates public accountability for the models that determine losses under stress and lead to the calibration of the resulting capital requirement. Publishing the scenario design process will also enhance and increase the accompanying guides for scenario variables. Currently, guides for only two variables are provided, which are the unemployment rate and housing prices and their change over the test projection horizon. These two guides will be enhanced, and additional detailed guides for variables related to the U.S. and international economies will be developed. Further, details will be disclosed about variable paths in the macroeconomic model, the framework and model components used to create the global market shock, and other changes in how the scenarios are designed. This will enable the public to access all relevant information to properly evaluate the hypothetical scenario each year. The second final rule reduces the volatility of the SCB requirement by averaging the results of a bank's two most recent annual stress tests. These tests examine the effect of stress capital levels on the resilience of large banks. They estimate losses, revenue, and capital levels under a hypothetical severe recession scenario. The results are used to determine the calibration of the SCB, which is one component of the amount of capital that large banks must hold to provide a buffer to absorb potential losses. Changes in annual test administration and the hypothetical scenario design have resulted in significant volatility over time. The new approach reduces volatility by averaging results over two consecutive years. In addition, by delaying the annual effective date of the SCB requirement from October 1 to January 1 of the following year, the change aligns compliance to calendar year and provides additional time to implement the resulting capital requirements. Together, these rules reduce SCB volatility by half without materially changing aggregate levels of required capital. We received a number of comments during the process, two of which I will highlight for this discussion. The first addresses risk sensitivity. It recommends establishing a specified date to freeze firm balance sheets prior to the release of the proposed scenarios shortly thereafter. The second improves risk capture. It recommends incorporating two global market shock scenarios on the same as-of date, with the larger loss used to calculate the SCB. This approach will reduce volatility in stress test results. I look forward to consideri
