The Federal Reserve finalized two rules on Sept. 30 that change how the annual stress test sets capital requirements for the country’s largest banks β the buffer each large bank must hold above its minimum capital ratio, and an input into how much lending, commercial real estate included, those balance sheets can support. Governor Michael S. Barr did not support the package, writing that it “will significantly weaken the stress test and consequently, bank resilience.”
The most consequential piece for lenders is mechanical. Starting in 2028, the Board will set each bank’s stress capital buffer by averaging the results of the two most recent annual stress tests rather than using the latest one alone, for firms tested in both years. The Fed said the changes together are “likely to reduce year-over-year volatility in capital requirements by approximately 50 percent” and “are not expected to materially affect aggregate capital requirements.”
A second final rule opens the machinery to public review. The Board must now invite comment every year on the hypothetical scenarios and on any material changes to the models it uses, and the rule adopts the models for the 2027 test. It also revises the global market shock applied to banks with large trading books: those firms will face two shock components annually, and the Fed will use whichever produces the larger losses for each firm. The Board separately asked for comment on reworking the model that projects banks’ fee income under stress, with comments due 60 days after Federal Register publication.
Why a bank-capital rule matters to property lenders
The stress capital buffer is the surcharge each large bank holds above its minimum capital ratio, and it is derived directly from the losses the Fed projects in its severely adverse scenario. Real estate lending is a substantial share of those projected losses. In the 2026 test results, published June 24, the Fed projected $624.9 billion of aggregate loan losses across the nine quarters from the first quarter of 2026 to the first quarter of 2028. Domestic commercial real estate accounted for $76.5 billion of that, an 8.8% portfolio loss rate, behind only credit cards at 17.1% and commercial and industrial loans at 9.0%. Domestic first-lien mortgages contributed $22.5 billion at a 1.5% loss rate, and junior liens and home equity lines another $5.5 billion at 3.2%.
The Fed noted in that report that losses rose from the prior year partly because the 2026 scenario applied “more severe changes in corporate bond spreads and commercial real estate prices,” a product of what it calls the countercyclical design of its scenario-setting.
Averaging cuts both ways, and the arithmetic is simple: it halves the first-year effect of any single year’s result, in either direction. A bank facing a sharp increase on one harsh scenario absorbs half of it the first year; a bank handed a mild scenario keeps half the relief. On our reading the practical consequence for borrowers is a steadier capital cost at the biggest lenders β the group that returned to commercial real estate lending and eased CRE loan standards in the second quarter, even as CMBS distress reached 10.91% in July in the securitized market.
A split board
Vice Chair for Supervision Michelle W. Bowman framed the rules as preserving rigor: “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.”
Barr’s statement went the other way. Disclosing the models and running annual comment processes on changes and scenarios “will make the stress tests less responsive to emerging risks,” the statement said. “Calcified models will also allow banks to optimize their balance sheets to the test, rather than focusing on underlying risk.” Barr drew an explicit parallel to the financial crisis, when institutions “treated mortgage-backed securities as safe and liquid assets,” and tied the rules to other recent moves β lower GSIB surcharges, reduced leverage ratios, cuts to supervisory staff β that the statement says are reducing the financial system’s resilience. Barr did back one element: using multiple scenarios for the global market shock and counting the larger losses.
Governor Lisa D. Cook was more sympathetic, writing that the finalized framework “preserves the Board’s capacity to administer a trustworthy, effective stress testing regime” and includes design features aimed at limiting “gaming” or “window-dressing.” But Cook attached a warning: “Market confidence in the stress tests comes from the fact that the scenarios are indeed stressful,” and “should stress tests become less severe or overly predictable over time, we may need to contemplate other options to maintain resilience.”
The averaging begins with the 2028 calculation, which the Fed said is meant to ensure that only models that have been through public comment are used. The 2027 test will run on the models adopted in this rule. More mortgage and finance coverage is on RealtyWire.
