Supervisory Stress Tests

Posted: 11 Dec 2015

See all articles by Beverly Hirtle

Beverly Hirtle

Federal Reserve Bank of New York - Banking Studies Department

Andreas Lehnert

Board of Governors of the Federal Reserve

Multiple version iconThere are 2 versions of this paper

Date Written: December 2015

Abstract

We describe the background, design choices, and particular details of stress tests used as part of an overall supervisory regime, that is, their formal integration into the ongoing prudential supervision of banks and other large financial institutions. We then describe how the US Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress testing (DFAST) regime is designed and what that means for the macroprudential versus microprudential nature of US supervisory exercises. We argue that routine stress tests have the potential to substantially change the nature of the supervisory process. We also argue that a great deal depends on the philosophy underpinning modeling decisions, which has not received as much attention as scenario design, disclosure, or other stress test design choices.

Suggested Citation

Hirtle, Beverly and Lehnert, Andreas, Supervisory Stress Tests (December 2015). Annual Review of Financial Economics, Vol. 7, pp. 339-355, 2015. Available at SSRN: https://ssrn.com/abstract=2702369 or http://dx.doi.org/10.1146/annurev-financial-111914-042040

Beverly Hirtle (Contact Author)

Federal Reserve Bank of New York - Banking Studies Department ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7544 (Phone)
212-720-8363 (Fax)

Andreas Lehnert

Board of Governors of the Federal Reserve ( email )

Washington, DC 20551
United States
202-452-3325 (Phone)
202-263-4852 (Fax)

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