Trade Groups Urge Fed to Revise Stress Test Framework

A group of financial trade associations urged the Federal Reserve to further revise its supervisory stress testing framework to improve risk capture, transparency, and alignment with the broader capital regime.

In a comprehensive joint comment letter, the Bank Policy Institute, American Bankers Association, Financial Services Forum, SIFMA, ISDA, and the U.S. Chamber of Commerce (the "Associations") responded to the Federal Reserve’s Notice of Proposed Rulemaking regarding "Enhanced Transparency and Public Accountability of the Supervisory Stress Test Models and Scenarios." While welcoming the Federal Reserve’s effort to open its modeling process to public comment, the associations warned that the proposal still relies on aggregated models, arbitrary transparency thresholds, and discretionary language that could increase capital volatility.

To address these concerns, the associations recommended that the Federal Reserve:

1. Retain the December 31 jump-off date. The associations opposed shifting the stress test jump-off date to September 30, arguing it would rely on stale interim data and create operational burdens by misaligning with firms’ year-end planning and budgeting processes.
2. Propose all model changes for public comment. The associations argued that limiting notice to "material model changes" is overly narrow and inconsistent with the Administrative Procedure Act. They urged the Federal Reserve to solicit comment on all model changes, noting that even minor adjustments can materially affect binding capital requirements in aggregate.
3. Codify substantive reforms and remove discretionary language. The associations urged the Federal Reserve to replace discretionary phrasing—such as stating it "will endeavor" or "expects to"—with binding requirements codified in rule text rather than policy statements to prevent arbitrary deviations and ensure accountability.
4. Enhance the SCB reconsideration process and disclose overlays. The associations called for extending the Stress Capital Buffer ("SCB") appeal window to 15 business days after receipt of firm-specific disclosures. They also urged the Federal Reserve to disclose firm-specific or industry-wide overlays to model results and permit appeals based on "economically irrational outcomes" or clear modeling errors.
5. Eliminate the dividend add-on and coordinate with Basel III. The associations argued that the dividend add-on component of the SCB is duplicative and should be eliminated. They also urged coordination between the Global Market Shock ("GMS") models and the Basel III endgame to avoid overcalibration, and they recommended prospective implementation of the SCB Averaging Proposal.
6. Increase granularity in Credit Risk Models. The associations argued that current credit risk models are overly aggregated and recommended recognizing guarantors and recourse in corporate and commercial real estate models, modeling construction loans separately, and using a 180-day default definition for credit cards instead of the proposed 120-day threshold.
7. Refine Market Risk and GMS Models. The associations urged the Federal Reserve to retain firm-provided, counterparty-level stressed inputs for Credit Valuation Adjustment ("CVA") losses rather than adopting a sensitivity-based model. They also recommended eliminating the Trading Issuer Default Loss component and recalibrating the Largest Counterparty Default model to reflect post-2008 reforms such as mandatory central clearing.
8. Overhaul Pre-Provision Net Revenue ("PPNR") Models. While supporting structural models for interest income and expense, the associations criticized the proposed Noninterest Revenue ("NIR") and Noninterest Expense ("NIE") models. They urged the Federal Reserve to reject the discount factor model for NIR and the efficiency ratio model for NIE, and instead develop more granular structural models tied to firms’ cost structures and business mix.
9. Reject CECL and simplify Deferred Tax Asset ("DTA") calculations. The associations opposed incorporating the Current Expected Credit Losses ("CECL") standard into the Provisions Model, citing added complexity with limited supervisory benefit. They also recommended applying standard regulatory capital deduction thresholds to DTAs rather than using a complex look-forward valuation allowance formula.
10. Establish coherence in Scenario Design. The associations warned that combining guide-based and model-based variables can produce economically inconsistent scenarios. They recommended guardrails for scenario adjustments, clarification of core inflation modeling, and differentiated treatment of international variables.
11. Streamline FR Y-14 data reporting. The associations urged eliminating duplicative reporting fields, applying materiality thresholds to new data collections, and removing edit checks that repeatedly generate false positives.