Federal Reserve Must Disclose Stress Test Models Within 90 Days, Prohibited From Climate Risk Testing

If you’ve ever felt like the rules for big banks are written in invisible ink, you’re not alone. This new piece of legislation, the Stress Testing Accountability and Transparency Act, is essentially an attempt to force the Federal Reserve (the Fed) to open up its playbook on how it calculates the financial health of the country’s largest financial institutions.

Opening the Fed’s Black Box

At the heart of this bill is a mandate for transparency concerning the Stress Capital Buffer (SCB). Think of the SCB as the emergency fund big banks must hold, determined by how well they survive the Fed’s annual financial stress tests. Currently, the precise models and assumptions the Fed uses to run these tests—the formulas that determine your bank’s required safety cushion—are largely opaque. This bill requires the Fed to issue a rule within 90 days detailing the specific models, assumptions, and formulas used to calculate the SCB for “covered companies.” For the financial sector, this is huge: it means more predictability in capital requirements, which ultimately affects how much money banks have to lend for mortgages and business loans.

Crucially, the bill also addresses the issue of “double counting.” It requires the Fed to make sure that capital requirements for the same risks are not counted twice—once in the SCB and again in other risk-based capital rules. For a busy person, this is the policy equivalent of making sure you’re not paying two different insurance premiums for the exact same coverage. If implemented correctly, this could streamline capital requirements and potentially free up capital for lending, though critics will watch closely to ensure this doesn't lead to an overall reduction in safety.

Advance Warning on Financial Storms

Beyond just showing their work, the Fed would also have to give a heads-up before the test even starts. The bill mandates that the Fed must publicly disclose the specific scenarios it plans to use for a stress test at least 60 days before conducting it. This is like telling students the general topics that will be on the final exam two months in advance, giving the banks time to prepare their data and analysis. While this improves predictability for the banks, it also raises the question of whether knowing the test scenarios too far in advance allows institutions to game the system rather than truly prepare for unexpected risks.

Where the Scope Stops: The Climate Test Ban

Here’s the part that policy wonks are flagging as a significant shift: The bill explicitly prohibits the Fed from subjecting any bank holding company or nonbank financial company to a climate-related stress test using its existing stress testing authority (Section 165(i) of the Financial Stability Act).

Why does this matter to you? Financial regulators have increasingly looked at climate change—like extreme weather events or the transition to green energy—as a potential risk to the entire financial system. For example, if a major hurricane wipes out a huge chunk of coastal real estate, that could trigger widespread defaults affecting banks nationwide. By banning the Fed from using this specific authority to model those climate-related risks, the bill effectively limits the Fed’s ability to assess and require capital cushions against these potentially systemic threats. While some argue this keeps the Fed focused on traditional financial risks, others worry it leaves a blind spot in the overall safety assessment.

Grading the Regulator

Finally, the bill introduces a new layer of oversight. It requires the Government Accountability Office (GAO) to conduct a study and submit a report to Congress every three years evaluating the effectiveness of the Fed’s stress tests. The report must specifically assess how well the tests are working to ensure the safety of the big financial companies and the stability of the entire U.S. financial system. This periodic, independent review is a win for accountability, ensuring that the Fed’s methods are scrutinized by a third party and that Congress is regularly informed about whether the stress tests are actually doing their job.