Associations Ask Fed to Recalibrate "Overly Severe" 2026 Stress Test Scenarios

Six financial and banking trade associations urged the Federal Reserve Board ("Fed") to recalibrate its proposed 2026 stress test scenarios to ensure they remain plausible and consistent with current market dynamics.

In a joint letter responding to the Fed's Request for Comment, SIFMA, ISDA, the ABA, the IIB, the Bank Policy Institute, and the Financial Services Forum emphasized that key elements of the proposed "severely adverse scenario" are "overly severe" and "implausible." They argued that the scenarios and models function as legislative rules that drive binding capital requirements and, therefore, must comply with due process and the Administrative Procedure Act by including clear methodologies, meaningful notice-and-comment, and fair notice of how discretion will be exercised.

The associations recommended the Fed:

• Reconsider Commercial Real Estate ("CRE") Severity. The associations argued that the proposed 40 percent decline in CRE prices was overly severe relative to the 30 percent decline in the 2025 scenario and to a similar "jump-off level." They noted that this increase in severity lacks sufficient explanation, ignores recent stabilization in CRE fundamentals, and risks increasing procyclicality in the stress tests.
• Moderate BBB Credit Spreads. The associations urged the Fed to adjust the pace and scale of increases in BBB credit spreads, noting that the proposed peak increase of 570 basis points exceeds movements observed during the global financial crisis and does not adequately reflect post-crisis reforms and lower leverage in the financial system.
• Justify Deviations from Macroeconomic Models and Clarify Jump-Off Values. The associations noted unexplained departures from the Fed’s macro model, and a lack of transparency around Q4 2025 jump-off values, and urged the Fed to disclose its methodologies and adjustments.
• Align GMS Equity Shocks. The associations recommended moderating equity dividend shocks in the "Global Market Shock" ("GMS") component, explaining that the proposed dividend shocks are materially more severe than the corresponding equity spot price shocks and inconsistent with historical correlations between spot and dividends.
• Refine the Largest Counterparty Default ("LCD") Scope. The associations requested that the Fed exclude sovereigns, public sector entities, and multilateral development banks rated AA- or better, or subject to 0%/20% risk weights under the capital rules, from the LCD component and align aggregation of sovereign-related counterparties with credit risk management practices.
• Correct Treatment of Agency Pass-Throughs. The associations noted that the GMS currently does not distinguish between deliverable and non-deliverable Agency pass-through securities, improperly implying that some deliverable pools could trade below the price of the related TBA. They urged the Fed to implement a control or temporary adjustment to correct this.
• Enhance GMS Disclosures. The associations urged the Fed to continue publishing relative shocks, not just absolute shocks, and to provide a clear, prescriptive mapping from the reduced set of GMS shocks to the original risk-factor template to avoid inconsistent implementation across firms.
• Improve Securitized Product Shock Design. The associations recommended that securitized product shocks include spread-based measures (not solely market-value shocks) and incorporate fundamental parameters, such as prepayment and default rates, to better capture risk and duration effects.
• Limit Unchecked Discretion and Resulting Volatility. The associations warned that the framework gives the Fed excessive discretion in calibrating scenario variables and GMS shocks, without clear criteria, risking incoherent scenarios and volatile capital requirements.