The Federal Reserve is considering a major change to the banking industry's "stress tests": it plans to use a two-year data average and extend the compliance buffer period.

The Federal Reserve on Thursday disclosed that it will implement systematic reforms to the annual stress testing mechanism for large banks, mainly including three core adjustments: first, changing the current testing method based on single-year financial data to using the weighted average of the most recent two years' financial data; second, delaying the effective date of new capital requirements from October 1 to January 1 of the following year, providing banks with a more ample adjustment window; third, planning to roll out more transparency-enhancing reform measures within the year. This reform aims to optimize the adaptability of the existing regulatory framework. According to the statement, the adjusted testing mechanism will continue to maintain the substantive strength of capital requirements, but the use of a "two-year rolling average method" is expected to smooth the impact of economic cycle fluctuations on testing results. The accompanying extension of the compliance buffer period will allow banks an additional three months to enhance their capital planning. To enhance regulatory transparency, the Federal Reserve plans to publish detailed algorithms of the stress testing models later this year and solicit public comments on scenario assumptions. This means that banks will have the opportunity to provide industry feedback on testing parameter settings before receiving regulatory directives, changing the previous criticism of "black-box operations." The Federal Reserve, which faced collective lawsuits from the banking industry last year due to opaque testing standards, still faces internal high-level disagreements over this reform. Federal Reserve Vice Chairman for Supervision Michael Barr publicly questioned the new proposal's potential to weaken the dynamic early warning function of tests, pointing out that "averaging operations will mask immediate risks, creating a false sense of security." Supporters of the reform, however, believe that the current 18-month lag in testing data timeliness has affected regulatory effectiveness and urgently need mechanism optimization to achieve "real-time risk perception." Adriana Kugler, a Federal Reserve Board member, expressed support for the plan but raised questions about the weighting of two-year financial data, noting an average 18-month time gap between the financial statements used to calculate stress capital buffer requirements and the effective date of these requirements. Kugler stated in a Federal Reserve statement, "The shortcomings of this proposed reform are that stress capital buffers are relatively insensitive to the current economic and company risk situation." According to the reform timetable, specific implementation details will be publicly solicited for comments from society within 60 days after being published in the Federal Register. This regulatory reform involving trillions of dollars in bank capital reflects the evolution of financial regulation in the post-crisis era and highlights the eternal issue of balancing safety and development.