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Supervisory Stress Tests

Author

Listed:
  • Andreas Lehnert

    (Board of Governors of the Federal Reserve System, Washington, DC 20551)

  • Beverly Hirtle

    (Federal Reserve Bank of New York, New York, NY 10045)

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

  • Andreas Lehnert & Beverly Hirtle, 2015. "Supervisory Stress Tests," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 339-355, December.
    • Handle: RePEc:anr:refeco:v:7:y:2015:p:339-355
    DOI: 10.1146/annurev-financial-111914-042040
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    References listed on IDEAS

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    1. Del Negro, Marco & Otrok, Christopher, 2007. "99 Luftballons: Monetary policy and the house price boom across U.S. states," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1962-1985, October.
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    More about this item

    Keywords

    bank capital; bank stress testing; bank supervision;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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