Board of Governors of the Federal Reserve System

Since the Supervisory Capital Assessment Program (or SCAP) in 2009, stress tests have been a critical tool both for the supervision of the largest banks and for monitoring financial stability risks. Using thoughtful, rigorous stress tests also has provided a more risk-focused alternative to higher through-the-cycle risk-based capital requirements.

I want to highlight two fundamental benefits of our stress testing work.

First, the data collected through the stress testing process have important analytical value regarding the largest banks and overall financial stability. The data allow us, and participating banks, to consider their particular risks in granular detail, across a range of macroeconomic environments. We also use these data internally to assess banking system exposure to novel shocks for financial stability analysis. While we must be attentive to the burden of our reporting requirements, the benefits of maintaining granular stress-testing reporting data are large and central to our supervisory and financial stability analysis.

Second, the trust and confidence that a rigorous, careful stress-testing process engenders is key to the strength and stability of the overall U.S. banking system. By disclosing banks' performance on the stress tests, and detailed information about the rigorous scenarios, the Board helps ensure that market participants and other members of the public can be confident that the U.S. banking system is resilient across a range of potential adverse scenarios.

I appreciate the concerns raised regarding disclosing even more granular information about the Board's models and taking comment on scenarios. Nevertheless, I am optimistic that the framework finalized today preserves the Board's capacity to administer a trustworthy, effective stress testing regime. For example, the framework contains certain policy design features aimed at maintaining the rigor of the stress tests by reducing the potential for "gaming" or "window-dressing" behavior. Further, the Board, as a supervisor, has other tools for addressing unusual or anomalous stress test results.

Market confidence in the stress tests comes from the fact that the scenarios are indeed stressful. Thus, we must remain vigilant that the scenarios continue to be sufficiently rigorous to continue to warrant that market confidence. Should stress tests become less severe or overly predictable over time, we may need to contemplate other options to maintain resilience.

Further, as I noted last year, and in the spirit of recent comments by Vice Chair for Supervision Bowman, I see significant benefits to using exploratory stress scenarios to maintain a dynamic and informationally rich stress testing program. Such exploratory stress scenarios may not have any direct effects on regulatory capital but would facilitate supervisors and banks gaining valuable information by considering alternative stress scenarios drawn from a wider range of economic conditions than those contemplated in the annual stress tests that determine stress capital buffers.

I also want to thank staff for their tireless work on the stress test package and the public for their comments and engagement.