Banking Associations Urge Fed to Revise 2026 Stress Tests

Six financial and banking trade associations urged the Board of Governors of the Federal Reserve System to revise the proposed 2026 Supervisory Stress Test scenarios to ensure they remain plausible and transparent.

In a joint comment letter responding to the Federal Reserve’s Request for Comment, SIFMA, ISDA, the American Bankers Association, the Bank Policy Institute, IIB and the Financial Services Forum raised concerns regarding the "overall coherence and plausibility" of the "severely adverse" stress test scenario. They emphasized that while stress testing is a critical tool, the current proposal relies on overly severe assumptions that diverge from historical data and lacks the procedural transparency required under the Administrative Procedure Act ("APA").

The associations outlined several recommendations to guide the Federal Reserve’s finalization of the 2026 scenarios:

1. Enhance Transparency and Accountability. The associations argued that the Federal Reserve must fully explain deviations from its own macroeconomic models—specifically regarding GDP, disposable income, and inflation variables—to comply with the APA and due process. They warned that retaining unchecked discretion to set variables without explanation undermines the public comment process and creates regulatory uncertainty.
2. Reconsider Commercial Real Estate Severity. The associations urged the Fed to justify or reconsider the proposed 40% decline in commercial real estate ("CRE") prices. They noted this is significantly more severe than the prior year's 30% decline, despite recent stabilization in CRE vacancy rates and rent growth and warned that such severity could increase procyclicality.
3. Moderate BBB Credit Spreads. The associations called on the Fed to adjust the pace and scale of BBB credit spread increases, noting that the proposed peak of 570 basis points is inconsistent with current market structures. They argued that the scenario compresses five-quarter movements from the Global Financial Crisis into a three-quarter window, disregarding post-crisis reforms that have successfully reduced bank leverage.
4. Align Global Market Shock Variables. The associations highlighted inconsistencies within the Global Market Shock ("GMS") component, specifically noting that equity dividend shocks are overly severe when compared to equity spot price shocks. They recommended aligning these variables to reflect valid historical correlations rather than applying conflicting stress levels.
5. Refine Largest Counterparty Default Scope. The associations recommended that the Largest Counterparty Default component explicitly exclude sovereign entities, public sector entities, and multilateral development banks rated AA- or higher. They argued this change would improve risk sensitivity and ensure a consistent approach across all firms.
6. Adjust Securitized Product Shocks. The associations called for the Fed to adopt spread-based shocks rather than market value-based shocks for securitized products in the GMS. They stated that a spread-based approach would better capture bond duration and align stress inputs with standard market conventions and internal risk models.
7. Clarify Jump-Off Value Determination. The associations urged the Fed to provide guardrails regarding how "jump-off" values will be determined, given that data for late 2025 is not yet available. They warned that without transparency, changes in these values could inadvertently result in a final scenario that is excessively severe in the aggregate.