Board of Governors of the Federal Reserve System

Thank you, Chair Powell.

I would like to begin by thanking our staff for their work on the stress testing proposals we will be considering today.

These proposals fulfill the Board's public commitment to seek comment on comprehensive changes to the supervisory stress test.¹ Last December, the Board committed to the basic contours of these changes, including to disclose and seek public comment on all of the models that determine the hypothetical losses and revenues of the subject banks under stress; public comment on changes to the framework that guides the design of the hypothetical scenarios; and to ensure that public comment will be solicited on the hypothetical scenarios for the upcoming 2026 stress test.

The staff have done excellent work to develop the proposals that fulfill this public commitment, and they have gone to extraordinary lengths to inform our Board members of the content of today's proposals.

With that said, however, I am disappointed that the Board's actions to address longstanding issues with the stress testing framework were not addressed proactively, but instead only after a lawsuit became inevitable. The Board's 2024 public commitment to make these changes was done in the interest of avoiding litigation challenging the legality of the stress testing framework.

Since its inception, the Board's stress testing program has operated with limited transparency, unreasonable year-over-year volatility, and the absence of any meaningful appeals process. These issues come as no surprise—we have been aware of these concerns for many years. Despite these issues and the growing threat of litigation over the past few years, the Board did not take meaningful remedial action before I became the vice chair for supervision.

In my view, going forward, the Board should not wait for the threat of litigation to become reality before addressing known problems with any of our regulations.

With this background and procedural history, I would now like to briefly discuss the substance of the proposals before us.

Today's proposals are designed to address the lack of transparency and public accountability in the Federal Reserve's supervisory stress testing process for large banks. This is a necessary improvement to promote due process and transparency. Currently, the stress test models, scenario design framework, and specific scenarios are not fully disclosed or open for 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.

The proposals seek to resolve these issues by publishing detailed information about the stress test models, scenario design process, and future scenarios for public comment. This would enhance banks' understanding of their capital requirements, improve the reliability of the supervisory models through public feedback, strengthen market discipline, and increase overall confidence in the fairness and effectiveness of the supervisory stress tests.

As vice chair for supervision, my responsibility is to advance this important package of stress testing reforms, reinforcing the Board's commitment to enhancing transparency and public accountability in the regulatory process. Given the comprehensive nature and complexity of these changes, it was essential to give all Board members sufficient time to carefully review and fully understand each component of the proposed reforms, which we have done. This approach supports a robust and well-informed decision-making process.

In closing, while there may have been opportunities to address certain issues sooner and thereby potentially avoiding litigation, I would like to again recognize the dedication and professionalism of the Board and Reserve Bank staff in preparing the proposals.

You have done excellent work, and I look forward to receiving feedback from the public as we move forward with these proposals.

I will now turn to our staff to review the details of the proposals and to answer any questions from Board Members.

1. Press Release, "Due to evolving legal landscape & changes in the framework of administrative law, Federal Reserve Board will soon seek public comment on significant changes to improve transparency of bank stress tests & reduce volatility of resulting capital requirements," December 23, 2024. In this press release, the Board committed to begin the public comment process on comprehensive changes to the stress test during the early part of 2025. Return to text