The Federal Reserve proposed retooling capital rules and annual “stress tests” for the largest U.S. financial firms, the first major big-bank rule change of the Trump era.

The Fed on Tuesday said the changes would simplify rules for big banks such as JPMorgan Chase & Co. and Wells Fargo & Co. without endangering the financial system.

“This proposal significantly simplifies our capital regime while maintaining its strength,” Fed Vice Chairman for Supervision Randal Quarles said.

Some parts are likely to be welcomed by big banks. The changes would reduce the possibility banks would fail the Fed’s annual stress tests, which examine whether firms can continue lending during a severe recession.

On the other hand, Wall Street banks have been clamoring that capital rules restricting their borrowing are too strict—and the changes would keep those rules steady or tighten them slightly for the biggest banks

“The question has been: Do we think the banks are overcapitalized, undercapitalized or appropriately capitalized?” one chief financial officer at a big bank said. Tuesday’s proposal suggests the Fed “thinks we are appropriately capitalized.”

For eight large U.S. banks considered “systemically important” to the global financial system, the proposals altogether would maintain or “in a few cases, increase” capital requirements, the Fed said. It didn’t specify which banks could face higher capital requirements.

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Banks are required to meet capital requirements in order to pass government stress tests. So what is capital, and how much is needed? WSJ’s Liz Hoffman reports. Illustration: Heather Seidel/The Wall Street Journal

In addition to JPMorgan, Wells Fargo and Citigroup Inc., that list of eight firms includes Goldman Sachs Group Inc., Morgan Stanley , Bank of America Corp., State Street Corp. and Bank of New York Mellon Corp.

For other large banks that don’t have global footprints, the Fed said capital requirements wouldn’t change or could go down modestly. That group includes U.S. Bancorp , Capital One Financial Corp. , PNC Financial Services Group Inc. and others.

High-profile slip-ups in stress tests have damaged the reputations of Citigroup and other firms in recent years. Banks must pass the test before rewarding investors with dividends and share buybacks.

Some of the Fed’s changes would make the tests easier to pass. The proposal would allow firms to project cuts in dividend payments and a shrinking balance sheet under stress, both assumptions they are prevented from making under current rules. That would boost banks’ capital levels in the stress test.

Bankers have been pressing for such changes. Fed officials said the proposed changes were designed to make the tests more realistic.

Banks also would no longer fail stress tests because the Fed projects they don’t have enough equity capital funding. In previous years, banks that failed this “quantitative” part of the tests were barred from increasing the amount of capital they pay to shareholders.

The largest, most complex banks, generally those with more than $250 billion in assets, could only fail the exams for “qualitative” reasons—for instance, if the Fed determines the firm has risk-management deficiencies.

The proposal also eliminates some of the Fed’s capital measurements, reducing the total number of big-bank capital requirements from 24 to 14, the Fed said.

For large Wall Street firms, those changes could be offset by another aspect of the proposal: Banks’ stress-test results would be used to calculate a “stress capital buffer” requirement, which the firms would have to meet during the ensuing year. If a firm’s capital falls below this level, it would face limits on its capital distributions or curbed bonus payments.

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That means the stress tests, which imagine doomsday scenarios, will still constrain big banks. Some bank executives have said the 2018 test, which assumes 10% unemployment and a 65% slide in the stock market, is unrealistically harsh.

The proposal was approved by the Fed’s governing board in a 3-0 vote. Mr. Quarles and Fed Chairman Jerome Powell, both nominated to their current posts by President Donald Trump, supported it along with Fed governor Lael Brainard, an Obama appointee.

The Fed will accept comments on the proposal during the next several months and officials said they hope to complete it in time for it to apply during the 2019 big-bank stress tests.

Write to Ryan Tracy at ryan.tracy@wsj.com and Liz Hoffman at liz.hoffman@wsj.com

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