Preface
The Federal Reserve promotes a safe, sound, and efficient banking system that supports the U.S. economy through its supervision and regulation of domestic and foreign banks.
As part of its supervision efforts, the Federal Reserve conducts annually a supervisory stress test. The stress test assesses how large banks are likely to perform under hypothetical economic conditions.1 Figure 1 summarizes the stress test cycle.
Figure 1. How stress testing works for large banks
The Federal Reserve conducts stress tests to ensure that large banks are sufficiently capitalized and able to lend to households and businesses even in a severe recession. The stress tests evaluate the financial resilience of banks by estimating losses, revenues, expenses, and resulting capital levels under hypothetical economic conditions.
The stress tests ensure that large banks are sufficiently capitalized and able to lend to households and businesses even in a severe recession. They evaluate the financial resilience of banks by estimating losses, revenues, expenses, and resulting capital levels under hypothetical economic conditions.
As part of this cycle, the Federal Reserve publishes four documents:
- Stress Test Scenarios describes the hypothetical economic conditions used in the supervisory stress test. The Stress Test Scenarios document is typically published by mid-February.
- Supervisory Stress Test Methodology provides details about the models and methodologies used in the supervisory stress test.
- Federal Reserve Stress Test Results reports the aggregate and individual bank results of the supervisory stress test, which assesses whether banks are sufficiently capitalized to absorb losses during a severe recession. The Federal Reserve Stress Test Results document is typically published at the end of the second quarter.
- Large Bank Capital Requirements announces the individual capital requirements for all large banks, which are partially determined by the results of the supervisory stress test. The Large Bank Capital Requirements document is typically published during the third quarter.
These publications can be found on the Stress Test Publications page (https://www.federalreserve.gov/publications/dodd-frank-act-stress-test-publications.htm).
For information on the Federal Reserve's supervision of large financial institutions, see https://www.federalreserve.gov/supervisionreg/large-financial-institutions.htm. For information on the Federal Reserve's supervision of capital planning processes of banks, see https://www.federalreserve.gov/supervisionreg/stress-tests-capital-planning.htm.
For more information on how the Federal Reserve Board promotes the safety and soundness of the banking system, see https://www.federalreserve.gov/supervisionreg.htm.
References
1. U.S. bank holding companies (BHCs), covered savings and loan holding companies (SLHCs), and intermediate holding companies of foreign banking organizations (IHCs) with $100 billion or more in assets are subject to the Federal Reserve Board's supervisory stress test rules (12 C.F.R. pt. 238, subpt. O; 12 C.F.R. pt. 252, subpt. E) and capital planning requirements (12 C.F.R. ยง 225.8; 12 C.F.R. pt. 238, subpt. S). Return to text