Fed's Tarullo on Next Steps in the Evolution of Stress Testing

Supervisory stress testing has become a cornerstone of post-crisis prudential regulation. Stress testing, unlike traditional capital requirements, provides a forward-looking assessment of losses that would be suffered under adverse economic scenarios. The simultaneous testing of the largest firms lends a perspective on a large part of the banking system and facilitates identification of common exposures and risks.
During the financial crisis, the success of an ad hoc stress test in assessing the capital needs of, and restoring confidence in, the nation’s largest financial institutions encouraged Congress to make stress testing a required and regular feature of large firm prudential regulation.1 The Federal Reserve has, in the succeeding years, substantially refined its supervisory stress test. Moreover, the stress test has been integrated into our Comprehensive Capital Analysis and Review (CCAR), which both ties the results of the test into the banks’ capital distribution practices and evaluates their risk management and capital planning capacities.
Today I want to share with you the results of an extensive review of the statutory stress test and CCAR programs, which we began following the end of the 2015 cycle. Before turning to the reasons for that review and some ideas for changing these programs that have arisen from it, I will take a few moments to summarize the characteristics and purposes of the programs as they have evolved to this point.
The full speech is available here.

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