Cyclicality and the Severity of the U.S. Supervisory Stress Test: 2014 to 2018
In this study, we provide a measure of the severity of the 2014-2018 US supervisory stress tests, and examine how that severity measure has evolved. Since the passage of the Dodd-Frank Act in 2011, large banks (over $50 billion in assets) have been required to undergo supervisory stress tests performed by the Federal Reserve.2 The supervisory stress test provides the public an evaluation of the resilience of the largest banking institutions to prolonged periods of severe stress. It is also used in the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) to evaluate the ability of firms to make planned capital distributions and remain adequately capitalized during periods of severe stress.3 That is, the amount of capital that banks may distribute to shareholders critically depends on the amount their capital is projected to decline in the supervisory stress test.
Jose Berrospide, Andrew Cohen, Ronel Elul, David Hou, Aytek Malkhozov, Marc Rodriguez, and Robert Sarama