The Federal Reserve finalised changes intended to reduce volatility in US stress-test capital requirements, while revised New Zealand bank capital rules began taking effect. The Basel Committee also approved changes to systemic-bank measurement designed to curb year-end window-dressing. Elsewhere, the Bank of England warned that sovereign, market and private-credit risks could crystallise together, exposing banks to simultaneous credit and liquidity pressures. The Monetary Authority of Singapore proposed stronger board-independence requirements to support scrutiny of management and risk controls. Read more on the week’s key developments: 1. Fed changes stress tests to smooth capital requirements while increasing trading-book sensitivity The Federal Reserve finalised two rules changing its supervisory stress-testing framework on 30 September. Banks with large trading books will face two global market shocks each year, with the shock producing the larger loss used for each firm. From 2028, the Fed will also average results from the two most recent annual supervisory stress tests when calculating stress capital buffers for firms tested in both years. It estimated that the changes would reduce year-on-year volatility in capital requirements by approximately 50% without materially changing aggregate requirements. The two measures affect capital differently. Averaging should make stress capital buffers less sensitive to a single year’s test, but it also means a severe result can influence requirements for longer. The dual market shocks seek to make losses more sensitive to each trading bank’s portfolio. Aggregate capital requirements are expected to remain broadly unchanged, although requirements could shift between individual banks according to their exposures. 2. New Zealand starts credit-risk changes as banks lose ability to issue qualifying AT1 New Zealand’s revised Banking Prudential Requirements began taking effect on 1 October. Banks may use the new standardised credit-risk weights immediately, must apply revised residential mortgage weights by 1 November and must implement all new standardised weights by 1 April 2027. New instruments can no longer qualify as additional Tier 1 (AT1) capital, although existing eligible instruments remain recognised during the transition. The Reserve Bank of New Zealand also set out an intended October increase in systemic banks’ prudential capital buffer from 5.5% to 6%. The transition changes both the denominator and composition of regulatory capital. Revised risk weights can alter risk-weighted assets (RWAs) before banks change the nominal size of their balance sheets, while the closure of new qualifying AT1 issuance shifts future loss-absorbing capacity towards common equity Tier 1 (CET1), Tier 2 and the broader capital framework due from 2028. Banks benefiting from revised risk weights could gain capital headroom sooner, although the higher prudential buffer for systemic banks would offset some of that benefit. 3. Basel Committee approves changes to curb G-SIB window-dressing The Basel Committee on Banking Supervision said on 1 October that it had approved the results of its end-2025 assessment of global systemically important banks (G-SIBs) and revisions to the G-SIB framework designed to reduce year-end window-dressing. The assessment will go to the Financial Stability Board before publication of the 2026 G-SIB list. The Committee also approved a final standard for machine-readable Pillar 3 disclosures and agreed to consult on additional Pillar 2 guidance for interest rate risk in the banking book. The decisions followed its meeting on 28–29 September. G-SIB measurement determines the additional CET1 surcharge applied to systemically important banks. Reducing firms’ ability to temporarily shrink or reposition exposures around reporting dates should make systemic-risk scores more representative of risks carried through the year. The capital effect cannot yet be quantified because the revised methodology and its implementation details have not been published. 4. PRA says UK bank ECL coverage is at its lowest since before Covid The Prudential Regulation Authority (PRA) said on 30 September that aggregate expected credit loss (ECL) coverage across major UK deposit-takers and asset classes had fallen to its lowest level since before Covid. It said the decline was consistent with stronger asset-quality indicators and did not itself indicate under-provisioning. However, the review found uneven implementation of model redevelopment, differences in ECL data governance and a continued supervisory focus on the completeness of post-model adjustments. For its 2027 work, the PRA has also asked auditors for their views on how banks identify and monitor credit risks in private-market exposures. If risk recognition lags deterioration, provisions and the resulting hit to retained earnings and CET1 could become more concentrated later. Private-market exposures complicate that process because leverage, interconnectedness and weaker data can make exposures harder to identify and aggregate. 5. Bank Millennium transfers consumer-loan risk to IFC with estimated 80-basis-point CET1 benefit Poland-headquartered Bank Millennium announced on 1 October that it had concluded a synthetic securitisation with the International Finance Corporation (IFC), the private-sector arm of the World Bank Group. The transaction, completed on 30 September, covers a consumer-loan reference portfolio valued at PLN 6.0 billion ($1.6 billion) as at 31 July. IFC provides a financial guarantee transferring a significant portion of the selected portfolio’s credit risk, while the loans remain on the bank’s balance sheet. Bank Millennium estimates that the transaction would increase its CET1 ratio by approximately 80 basis points relative to figures reported at the end of June. Recognition of the capital benefit remains conditional on supervisory confirmation that significant risk transfer requirements have been met. The transaction allows the bank to retain the loans and customer relationships while reducing the credit risk it bears. 6. Four US banks account for 80.2% of banking-sector derivatives notional Four large US banks held 80.2% of the banking industry’s $300.5 trillion in derivatives notional at the end of the second quarter, according to an Office of the Comptroller of the Currency (OCC) report published on 30 September. Initial credit exposure before netting increased 3.6% to $3.1 trillion, while net current credit exposure fell 10.6% to $291.0 billion. Interest rate contracts accounted for $205.9 trillion, or 68.5%, of total derivatives notional. Netting, collateral and contract structure affect counterparty risk, so notional amounts do not measure credit exposure. Concentration in four dealers leaves much of the system reliant on a small group of counterparties. A counterparty shock or abrupt repricing can raise replacement costs and collateral requirements together, creating liquidity demands even when net current exposure is comparatively small. 7. RBA estimates Australian bank CET1 would fall to 11.6% under adverse scenario Australia’s banking system had a CET1 ratio of 12.4% in June 2026 and would remain at around 11.6% under a very adverse domestic downturn, the Reserve Bank of Australia (RBA) reported in its Financial Stability Review published on 1 October. The Chapter 3 scenario included a sharp 20% decline in housing prices alongside a 3% fall in GDP. The RBA said very few banks would use a substantial proportion of their capital buffers, reflecting strong starting capital and profitability. Projected net interest income would provide a substantial buffer against larger falls in capital ratios. The modest projected capital decline reflects strong starting capital and earnings that cushion credit losses. Loan losses, weaker earnings and RWA increases can reinforce each other in a downturn, while falling property values reduce the collateral protection available when defaults rise. The result demonstrates resilience under the RBA’s scenario, although individual banks’ outcomes would vary with their portfolio composition. 8. Bank of England warns sovereign, asset-valuation and private-credit risks could crystallise together The Bank of England’s Financial Policy Committee said on 30 September that the likelihood of interconnected financial-system vulnerabilities crystallising had increased. It highlighted the possibility of simultaneous stress across sovereign debt markets, risky asset valuations and risky credit, including private credit. Global private-market assets under management had reached around $16 trillion, while private equity and private credit together had grown from about $3 trillion to $11 trillion over the past decade. The Committee said leveraged borrowers remained vulnerable to tighter financing conditions and noted continued redemption pressures in parts of private credit. The risk extends beyond an increase in private-credit defaults. A simultaneous repricing of sovereign bonds, risky assets and leveraged credit can transmit through funding costs, collateral values, margin calls and interconnected exposures between banks and non-bank financial institutions. Floating-rate private debt makes highly leveraged borrowers particularly sensitive to higher rates, while limited data make the scale and location of losses harder to assess. 9. MAS proposes stronger independent oversight at systemically important banks The Monetary Authority of Singapore proposed governance changes on 30 September requiring larger boards and majority-independent membership at domestic systemically important banks and full banks. The consultation would also tighten director-independence criteria covering employment or dealings with related corporations and affiliates, and require prior approval for chief information officer appointments at domestic systemically important banks. Responses are due by 9 December. Closer ties to management or related companies can weaken directors’ scrutiny of lending, exposures and risk controls. The proposed independence criteria would strengthen safeguards against those conflicts, while approval of technology chiefs would extend oversight to appointments responsible for information and technology risk. Some appointment approvals would be removed for lower-impact institutions. 10. BNP Paribas addresses repo-continuity weakness in US resolution plan The Federal Reserve and Federal Deposit Insurance Corporation said on 29 September that BNP Paribas had satisfactorily addressed a shortcoming identified in its 2021 resolution plan. The earlier plan had failed to explain how repurchase-agreement trading, settlement, oversight and risk management would continue following the failure of its US broker-dealer. The 2025 plan described how affiliates would conduct most of those activities after such a failure. The agencies identified no shortcomings or deficiencies in BNP Paribas’s submission or those of the other 14 banking organisations reviewed. The finding closes the identified remediation issue. In an actual failure, liquidity and loss-absorbing resources would still need to reach the appropriate legal entities while repo trading, settlement and risk management continue. Supervisory acceptance of the plan does not establish how smoothly those arrangements would operate during cross-border stress.
