The Federal Reserve put forth a proposal Friday to publish the models and methodologies the central bank uses every year to stress test the nation’s largest banks in an effort to increase transparency of the tests.

“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,” Fed Vice Chair of Supervision Michelle Bowman said in a statement.

Currently, the stress test models, how the models are designed, and specific scenarios are not fully disclosed or open for public comment. Bowman contends that 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 Fed’s stress tests were mandated annually by law after the 2008 financial crisis for banks with $100 billion or more in total assets. They examine whether banks could continue lending to households and businesses during a hypothetical severe recession, in order to prevent bank failures in a future crisis.

The stress tests estimate bank losses, revenues, expenses, and resulting capital levels — which provide a cushion against losses — under hypothetical recession scenarios into the future. The Fed uses the results of a stress test, in part, to set large bank capital requirements.

Last December, the Fed announced that it would seek public comment on changes to improve the transparency of its stress tests. The announcement came right after a consortium of banks and bank lobbyists sued the central bank over lack of transparency, claiming the Fed's determination for how big banks perform against hypothetical economic turmoil and its process for assigning capital requirements violate the law by not following proper administrative procedure.

Bowman said she is “disappointed” that the Fed did not take action sooner on issues surrounding the Fed’s stress testing framework until after a lawsuit was filed. Now, the Fed is seeking comment on the actual stress test models, the framework it uses to design the stress test scenarios, and stress test scenarios for 2026. The disclosure of the stress test models would offer comprehensive descriptions of each model for equations, variables, and coefficients used, as well as assumptions and limitations of each model.

The proposals seek to resolve those 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, the Fed says.

The proposed changes are not expected to materially change capital requirements, but the precise impact could vary each year based on stress test scenarios and specific firm data.

An analysis by the Fed across a range of conditions showed that capital requirements should remain essentially unchanged.

But Fed Governor Michael Barr, who preceded Bowman as vice chair of supervision, said he disagrees with the changes because he believes they will lead to weaker bank capital requirements and “cannot support” the proposed changes to the stress tests. Barr underscored that disclosing the models and scenarios will make the stress test “weaker and less credible.”

“The proposed changes to the framework and models risk turning the stress test into an ossified exercise that will provide illusory comfort in the resilience of the system,” Barr said in a statement. “They will lead to overly optimistic projections in the stress test, both because of less conservative modeling choices and because of the potential for gaming by banks. Altogether, these changes will leave banks in a worse position to weather stress.”

Barr also says he thinks the changes to a more routinized nature of the stress test will lead banks to reduce the capital management buffers that they hold above required capital.

Under the proposal, the Fed would annually request public comment on the stress test scenarios and any material changes to the stress test models.

Comments on the stress test scenarios for 2026 are due on or before Dec. 1, while comments for the stress test models and how they’re designed are due by late January next year.