FRB Finalizes 2026 Bank Stress Tests

In the newly released and final 2026 stress testing scenarios for large banks, the Federal Reserve Board of Governors ("FRB") maintained current stress capital buffer requirements.

The FRB voted to maintain the current stress capital buffer requirements through 2027, when updated requirements may be calculated using models that incorporate public feedback.

Based on comments received and updated financial data, the FRB made several changes to the proposed 2026 scenarios, specifically as to the severely adverse scenario and the global market shock component. The FRB emphasized that the scenarios are not "forecasts" but are informed by the new "Proposed 2025 Scenario Design Policy Statement" intended to increase transparency.

The severely adverse scenario simulates a "hypothetical severe global recession triggered by an abrupt decline in risk appetite," featuring heightened financial market volatility and substantial declines in asset prices. Under the final 2026 severely adverse scenario, "[t]he U.S. unemployment rate rises 5.5 percentage points" to a peak of 10% by the third quarter of 2027. The scenario assumes a 58% drop in equity prices and significant real estate distress, including a 30% decline in house prices and a 39% decline in commercial real estate prices. Additionally, "corporate bond markets deteriorate markedly" with spreads widening to 5.7 percentage points, while banks with large trading operations must account for a global market shock and the default of their largest counterparty.

Compared to the 2025 severely adverse scenario, the 2026 final version features (i) an identical peak unemployment rate of 10%, though the "increase in the unemployment rate ... is smaller" due to a higher starting point, (ii) a "somewhat smaller decline in house prices," (iii) a decline in commercial real estate prices that is greater than last year, (iv) a "more severe" decline in equity prices, and (v) a recession that is "somewhat less severe for Japan and developing Asia" but "somewhat more severe for the euro area and the United Kingdom."

As to the final 2026 global market shock component of the stress test, the changes included adjustments that "reduce the shock magnitudes for agency pass-through securities and to certain commodities."

On maintaining the current stress capital buffer requirements through 2027 to incorporate public feedback:

Fed Governor Lisa D. Cook called the action necessary to preserve the credibility of the stress testing program. She acknowledged that releasing the proposed scenarios for public comment before they take effect could encourage banks to adjust balance sheets to reduce projected losses but said the buffer extension mitigated that risk for this cycle. She also urged the Fed to incorporate exploratory stress scenarios to evaluate a broader range of potential economic shocks.

Fed Governor Michael S. Barr dissented from the Fed’s decision to extend existing stress capital buffer requirements. He argued that subjecting stress testing models to notice-and-comment causes the framework to stagnate and freeze buffers at "outdated levels" rather than reflect banks’ current risk profiles. He also criticized recent model changes accompanying the 2026 scenario release, warning that they reduced the severity of the stress test and undermined its credibility.