General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
July 18, 2018

Ms Beverly Hirtle of the Federal Reserve Bank of New York spoke at the conference on "The Effects of Post-Crisis Banking Reforms" in New York City. She discussed the current supervisory stress testing regime and assessed whether it continues to address the macro-prudential objectives. For this discussion, she used the six elements that she and her co-authors argued, in a paper, made the Supervisory Capital Assessment Program (SCAP) a successful macro-prudential exercise. These six elements are comprehensiveness; consistency; multiple, independent estimates; diverse perspectives; transparency of process and results; and clear and predictable goals and actions.

Referring to the recent passage of the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCP Act), she said that many banks will no longer be subject to DFAST supervisory stress testing or could participate only on a periodic basis. Whether the set of banks that continue to be subject to the annual DFAST supervisory stress testing represents a large enough share of the overall banking industry and sufficiently spans the range of banking activities to provide a comprehensive perspective is something that merits monitoring and analysis, said Ms. Hirtle. She also mentioned that their paper argued that the financial crisis environment gave the SCAP a very clear goal of providing confidence that the banking system could continue to lend even under more dire economic conditions, as a way of mitigating the chance that those dire economic conditions actually materialized. In that sense, the SCAP was very much a "lean into the wind" macro-prudential exercise.

However, in the current environment, she would argue that the goals of the supervisory stress testing regime are more diffuse. There are clearly micro-prudential "safety and soundness" objectives related to sound capital planning, risk identification, and capital adequacy at each of the firms participating in the exercise.  These are critically important objectives. According to her: “What is less clear to me is what role cyclical macro-prudential concerns play in the evolving stress testing regime. Clearly, the design of the stress test scenarios, which embed a number of counter-cyclical features, is an important channel for "lean against the wind" or "lean into the wind" efforts. However, narrowing the set of firms subject to DFAST supervisory stress testing potentially pushes away from the broader cyclical perspective. Less of the banking industry will be covered by the stress tests and assessments of the strength of the industry will be based on a smaller part of the whole.“

She believes that ensuring that the largest and most systemically important banks do robust capital and liquidity planning, have strong internal controls, do good risk identification, and have very healthy amounts of capital (especially common equity) and liquidity resources is fundamental to fostering a stable banking system that can perform its critical financial intermediation role in both calm and stressed economic environments. “What I hoped to do today is simply to point out that one of the key objectives of the original SCAP stress program—leaning into the wind during a severe economic downturn—might be getting less emphasis as the time since the financial crisis grows, the economic expansion continues, and the supervisory stress testing regime evolves,” said Ms. Hirtle.


Related Link: Speech

Keywords: Americas, US, Banking, Stress Testing, DFAST, EGRRCP Act, SCAP, BIS

Related Articles

HKMA Decides to Maintain Countercyclical Capital Buffer at 2.5%

HKMA announced that, in accordance with the Banking (Capital) Rules, the countercyclical capital buffer (CCyB) ratio for Hong Kong remains at 2.5%.

April 16, 2019 WebPage Regulatory News

EP Approves Agreement on Package of CRD 5, CRR 2, BRRD 2, and SRMR 2

The European Parliament (EP) approved the final agreement on a package of reforms proposed by EC to strengthen the resilience and resolvability of European banks.

April 16, 2019 WebPage Regulatory News

FDIC Consults on Approach to Resolution Planning for IDIs

FDIC approved an Advance Notice of Proposed Rulemaking (ANPR) and is seeking comment on ways to tailor and improve its rule requiring certain insured depository institutions (IDIs) to submit resolution plans.

April 16, 2019 WebPage Regulatory News

EP Resolution on Proposal for Sovereign Bond Backed Securities

The European Parliament (EP) published adopted text on the proposal for a regulation of the European Parliament and of the Council on sovereign bond-backed securities (SBBS).

April 16, 2019 WebPage Regulatory News

PRA Seeks Input and Issues Specifications for Insurance Stress Tests

PRA announced that it will conduct an insurance stress test for the largest regulated life and general insurers from July to September 2019.

April 15, 2019 WebPage Regulatory News

PRA Finalizes Policy on Approach to Managing Climate Change Risks

PRA published the policy statement PS11/19, which contains final supervisory statement (SS3/19) on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change (Appendix).

April 15, 2019 WebPage Regulatory News

EBA Single Rulebook Q&A: First Update for April 2019

EBA published answers to nine questions under the Single Rulebook question and answer (Q&A) updates for this week.

April 12, 2019 WebPage Regulatory News

EIOPA Statement on Application of Proportionality in SCR Supervision

EIOPA published a supervisory statement on the application of proportionality principle in the supervision of the Solvency Capital Requirement (SCR) calculated in accordance with the standard formula.

April 11, 2019 WebPage Regulatory News

FED Updates Form and Supplemental Instructions for FR Y-9C Reporting

FED updated the form and supplemental instructions for FR Y-9C reporting. FR Y-9C is used to collect data from domestic bank holding companies, savings and loan holding companies, U.S intermediate holding companies, and securities holding companies with total consolidated assets of USD 3 billion or more.

April 11, 2019 WebPage Regulatory News

OSFI Finalizes Guidelines on Liquidity Adequacy and NSFR Disclosures

OSFI published the final Liquidity Adequacy Requirements (LAR) guideline and the net stable funding ratio (NSFR) disclosure requirements guideline.

April 11, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2920