Understanding the Effects of the U.S. Stress Tests

Understanding the Effects of the U.S. Stress Tests

The macroprudential elements of the stress tests arise from: the scenario design, which is set to vary over time with the economic and financial cycles; the requirement to hold portfolios constant in the stress, which is intended to assure that in such circumstances banks don’t need to reduce credit supply in order to maintain adequate capital ratios; and the requirement to hold enough capital to fund future capital distributions even in a severe stress, as distributions rise in good times and fall in bad. Our objective in this paper is to assess some of the effects of this new prudential tool as implemented in the United States, to contribute to the Federal Reserve Board’s review of its supervisory stress tests. Vice Chairman for Supervision, Randal Quarles, has reached out to the public to participate in the review which has a goal “to preserve the strength of the test, while improving its efficiency, transparency, and integration into the post-crisis regulatory framework.”

Donald Kohn and Nellie Liang


July 9, 2019

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