A stress testing regime that incorporated these feedbacks, including the potential for liquidity pressures, bank runs, and firesale risk, would be considerably more complex to implement, and would likely involve a greater degree of abstraction and simplification – and thus less “precision” – than the current supervisory capital stress tests. In that regard, the drive for precision and accuracy at the individual institution level – and the resulting complexity of the supervisory models and extensive firm-specific data inputs needed to run the models – has created other challenges. Perhaps the most notable of these is that generating the supervisory projections is resource- and time-intensive, which limits the number of scenarios that can be assessed during any particular CCAR cycle. Some have suggested that stress testing would be more effective if many supervisory scenarios were examined, instead of just a few. Any individual scenario could miss important risk exposures at individual banks or in the sector as a whole. Turning that thought around, a single scenario might not uncover true capital vulnerabilities at all institutions. The bank-generated scenarios that are part of the CCAR program are certainly an important channel to address concerns about idiosyncratic risk, as banks are meant to self-identify the scenarios that would be especially stressful for them. But running multiple common supervisory scenarios could provide a more robust assessment of the capital strength of the broader banking industry, at least as represented by the firms taking part in the CCAR and DFAST programs.

There is a growing body of literature that examines the impact of stress testing and other changes to regulatory capital requirements (Basel 2.0, 2.5 and 3.0) on lending to various categories of borrowers. This is an important area of research, but in my view, it is somewhat incomplete in its focus. To begin, studies that focus on lending by banks participating in the CCAR/DFAST stress tests ignore the possibility of substitution of this activity to non-stresstested banks or to non-banks. This substitution effect could have significant consequences for both current economic activity and for systemic risk, channels that are important to understand in assessing the full impact of the programs. Some studies have looked more broadly at these substitution effects, but more work here – especially substitution into the non-bank sector – would be very helpful. Further, examining how lending has been impacted in the current economic environment of strong economic activity does not quite provide the full picture, as it does not address whether 6/8  BIS central bankers' speeches  these programs will be successful in mitigating spillovers, credit contractions and other negative outcomes during periods of stress. In assessing the costs and benefits of stress testing and other post-crisis regulations, it seems critical to assess not just current impact but outcomes over the cycle – something that is a challenge during a period of recovery and growth. A related set of questions concerns how stress testing affects the cyclicality of capital requirements and what degree of cyclicality is appropriate.