Stress Testing Lessons from the Banking Turmoil of 2023

38 Pages Posted: 30 Apr 2024

See all articles by Natasha Sarin

Natasha Sarin

Yale University Law School and Yale School of Management

Til Schuermann

Oliver Wyman

Date Written: April 29, 2024

Abstract

Despite the clear success of stress testing as a crisis and peacetime risk management and
capital adequacy tool, the series of bank failures and resultant turmoil in the banking system
revealed flaws in the stress testing regime that today governs the regulatory capital regime.
We make four recommendations for improving stress testing, and specifically suggest: 1)
using multiple scenarios to allow exploration of a wider set of risks; 2) disclosing (stressed)
fair value for the assessment of all securities held on banks’ balance sheets; 3) stress testing of
funding and liquidity risk; and 4) subjecting more banks to the stress tests. Taken together,
these reforms would usefully improve the dynamism of the financial regulatory regime.

Keywords: financial regulation, stress-testing, financial stability, crisis, bank capital

JEL Classification: G28, E58, G21

Suggested Citation

Sarin, Natasha and Schuermann, Til, Stress Testing Lessons from the Banking Turmoil of 2023 (April 29, 2024). Available at SSRN: https://ssrn.com/abstract=4811157 or http://dx.doi.org/10.2139/ssrn.4811157

Natasha Sarin (Contact Author)

Yale University Law School and Yale School of Management ( email )

127 Wall St.
New Haven, CT 06511
United States
2034325552 (Phone)
20001-4959 (Fax)

Til Schuermann

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

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