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Stress Tests and Policy

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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.

Suggested Citation

  • Metrick, Andrew, 2021. "Stress Tests and Policy," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 3(1), pages 1-19, April.
    • Handle: RePEc:ysm:ypfsfc:3111
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    File URL: https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=1132&context=journal-of-financial-crises
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    References listed on IDEAS

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    1. Beverly Hirtle & Til Schuermann & Kevin J. Stiroh, 2009. "Macroprudential supervision of financial institutions: lessons from the SCAP," Staff Reports 409, Federal Reserve Bank of New York.
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    3. Stanton, Thomas H., 2012. "Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis," OUP Catalogue, Oxford University Press, number 9780199915996.
    4. H Peyton Young & Mark Paddrik, 2017. "How Safe are Central Counterparties in Derivatives Markets?," Economics Series Working Papers 826, University of Oxford, Department of Economics.
    5. W. Scott Frame & Kristopher Gerardi & Paul S. Willen, 2015. "The failure of supervisory stress testing: Fannie Mae, Freddie Mac, and OFHEO," FRB Atlanta Working Paper 2015-3, Federal Reserve Bank of Atlanta.
    6. Schuermann, Til, 2016. "Stress Testing in Wartime and in Peacetime," Working Papers 16-01, University of Pennsylvania, Wharton School, Weiss Center.
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    More about this item

    Keywords

    Supervisory Capital Assessment Program; SCAP; DFAST; CCAR; Federal Reserve; bank-capital policy; macroprudential policy; supervision; transparency;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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