The Federal Reserve's stress test assesses whether banks are sufficiently capitalized to absorb losses during stressful conditions while meeting obligations to creditors and counterparties and continuing to be able to lend to households and businesses.1 The Federal Reserve Board uses the stress test to set the stress capital buffer (SCB) requirement, which integrates the stress test with the non-stress capital requirements into one forward-looking and risk-sensitive framework.2
The Federal Reserve conducts the stress test annually, using a minimum of two different scenarios to test a bank's capital adequacy during times of stress, and publicly discloses bank-level results. Banks must also conduct and publicly disclose the results of their company-run stress tests based on their risk profiles, as defined by the Board's stress testing rules.3
Capital stress tests, which played a role in bolstering confidence in the capital positions of U.S. banks during the 2007-09 financial crisis, have become a critical supervisory tool.
Stress Testing Under the Prior Capital Frameworks
Starting in 2013, the Federal Reserve's capital assessment of large banks consisted of two primary components: the Dodd-Frank Act Stress Test (stress test) and the Comprehensive Capital Analysis and Review (CCAR).
The stress test is a forward-looking quantitative evaluation of bank capital that demonstrates how a hypothetical macroeconomic recession scenario would affect firm capital ratios. For the first several years of stress testing, CCAR was a public exercise that included a quantitative and qualitative assessment. The quantitative assessment evaluated whether banks had sufficient capital to continue operations throughout times of economic and financial market stress. The qualitative assessment evaluated whether banks had robust, forward-looking capital planning processes that account for their unique risks.
In 2019, the Board incorporated the qualitative evaluation into the standard, confidential supervisory process. In 2020, the Federal Reserve replaced the quantitative CCAR evaluation with the stress capital buffer. The stress capital buffer requirement simplifies the Board's capital framework by integrating the Board's non-stress regulatory capital requirements with its stress-test-based capital requirements under CCAR.
In part due to the revised regulatory capital rules, the Federal Reserve's stress testing program, and enhanced supervisory program, the largest banking organizations supervised by the Federal Reserve have more than doubled their common equity capital in aggregate since 2009.
1. U.S. bank holding companies (BHCs), 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 Board's supervisory stress test rule (12 C.F.R. pt. 238, subpart O; 12 C.F.R. pt. 252, subpart E) and capital planning requirements (12 C.F.R. § 225.8; 12 C.F.R. pt. 238, subpart S). Return to text
3. See 12 CFR 252. Return to text