Today I will use these elements to talk about the current supervisory stress testing regime and assess whether it continues to address macroprudential objectives. I should note that my focus today is on the broad structure of supervisory stress testing and not on any specific set of stress test results. As you know, the 2018 DFAST results were released yesterday and the corresponding CCAR results will be released next week. I am not going to discuss these results or draw any inferences from them. Comprehensiveness Let me start the discussion with the first of the elements: comprehensiveness. As noted, the set of banks participating in the SCAP accounted for a large portion of the assets and loans in the U.S. banking industry and spanned nearly all significant banking industry activities. In 2009, we argued that this comprehensiveness was essential in achieving the SCAP’s macroprudential goals as the collective stress test results provided a view into a large share of the industry. More important, through the subsequent capital raises, the SCAP helped ensure that this large segment was sufficiently well capitalized to provide a buffer to the broader economy against possible future bad outcomes. After the SCAP, the Dodd-Frank Act expanded the set of banking companies subject to supervisory stress testing to include all bank holding companies with assets exceeding $ billion—about another 15 to 20 firms, including the U.S. operations of many large, foreign-owned banks. In 2018, a total of 35 firms participated in the CCAR and DFAST stress tests.

Given the early state of the art, the SCAP team brought together supervisors, economists, attorneys, accountants, financial analysts, regulatory capital experts and others from the Fed and the other supervisory agencies involved in the program. This kind of multi-disciplinary approach is now embedded in many aspects of supervision, including the LISCC, which includes economists, attorneys and financial market experts, as well as supervisors. The blending of bank-generated and supervisory estimates may be the aspect of the supervisory stress testing regime that has evolved most significantly since the SCAP. Supervisory stress test results are now based on models developed by supervisors that rely on detailed firm-specific data filed through regulatory reports, so the results now represent a fully distinct and independent supervisory view. 4 And, as described above, banks are required to generate their own stress test estimates. Public disclosure of both sets of results based on the common supervisory scenarios has provided diverse perspectives on banks’ capital vulnerabilities. Diverse perspectives, especially those from outside the banking industry and supervisory community, continue to be critical in supporting stress testing’s macroprudential objectives. Academic economists can play an especially important role in helping to foster innovation and creativity by advancing thinking on stress test scenario design and on modeling techniques that better capture the impact of the external environment on bank financial condition. A particularly ripe area for fresh thought, in my view, concerns modeling revenues and non-credit expenses— so-called pre-provision net revenue, or PPNR—an area that is notoriously difficult to assess.