Stress Tests and Policy

Abstract

Ten years after the Federal Reserve’s crisis-era bank stress test, it is time to recalibrate the stress tests for “peacetime.” Outside of a crisis, supervisors should tailor stress tests to focus on their comparative advantages by taking a macroprudential focus, with severe scenarios that enable them to learn about emerging risks in both traditional and shadow banking sectors. In peacetime, also, supervisors should emphasize risk management practices and be wary of forcing rapid changes in capital levels for individual banks, while linking stress-test results with countercyclical capital buffers across the system.

Keywords: stress tests, macroprudential, countercyclical, capital policy