The Federal Reserve on Wednesday finalized two rules that proponents argue would bolster transparency and public accountability in the bank stress-testing process and reduce volatility in year-to-year changes to capital requirements.

One rule would require the Fed board to let the public comment on annual stress test scenarios and any material changes to related models. Banks will now be tested against two global market shock components each year. Companies’ stress-test results will be measured using the shock that creates the larger loss.

The other rule would require the Fed to calculate a bank’s stress capital buffer using the average of the last two annual tests. That second rule is set to take effect in 2028.

Alongside the rules, the Fed requested public comment on a revision to the model the central bank uses to measure noninterest income. Feedback on the move, meant to better capture differences in the ways banks generate fee income, will be due 60 days after the proposal is published in the Federal Register.

The Fed said Wednesday’s changes, taken together, could cut in half the yearly volatility banks see in stress test-mandated capital requirements.

"The stress test is an essential component of our regulatory capital framework," Michelle Bowman, the Fed’s vice chair for supervision, said in a statement Wednesday. "Today's changes preserve its resilience by ensuring that it is transparent, granular and risk-sensitive. The public will now have greater assurance that the risks banks take will be reflected appropriately in their stress test losses and their capital requirements."

Fed governors voted 6-1 to finalize the first of the two rules. Michael Barr, Bowman’s predecessor as the Fed’s supervision czar, dissented.

There are “aspects” of the rule Barr supports, he said, but “over time, the rule will reduce the dynamism, rigor, conservatism, and credibility of the stress test and thus undermine financial stability.”

“Disclosure of the stress test models and annual public comment processes on model changes and scenarios will make the stress tests less responsive to emerging risks,” Barr said. “Calcified models will also allow banks to optimize their balance sheets to the test, rather than focusing on underlying risk.”

Wednesday’s rules have long been telegraphed. They differ little from initial versions that were proposed last October. Bowman teased the updates this month during a speech in London.

The Fed’s December 2024 effort to address stress-test transparency and capital-requirements volatility saw a lawsuit filed by trade groups including the American Bankers Association and the Bank Policy Institute.

Those groups Wednesday hailed the Fed’s reproposal as “an example of how opening the process to public comment – as required by the Administrative Procedure Act – is driving better policy.”

“Transparency and public input have produced a better stress testing framework that should improve accuracy and allow more thoughtful capital planning at covered banks, with economic benefits to the country,” the ABA and BPI said. "We appreciate that the Fed is taking the time and using an appropriate process to fix flaws in those models identified in the recent comment process.”