The DFAST and CCAR stress tests adopt a “walk-through-time” approach, in which net income and capital ratios are calculated on a quarterby-quarter basis throughout the stress test horizon.10 An alternative approach would be to apply cumulative losses and revenues in a single, instantaneous shock – this was what was done in the SCAP. While the two approaches might be assumed to produce roughly consistent results, the walk-through-time approach may better capture true vulnerabilities, especially in cases where negative net income quarters come early in the stress test horizon but revenues accrue most strongly in subsequent quarters. The instantaneous shock approach implicitly recognizes revenues from later in the horizon as offsets to losses that occur early in the horizon and thus may overstate true capital resources. The tradeoff is that the walk-through-time approach implies a degree of precision about the quarter-by-quarter pattern of losses and revenues that might be beyond the capabilities of existing modeling technology (this was the judgment at the time of the SCAP). But the walk-through-time approach requires further assumptions, particularly regarding the evolution of the balance sheet. These assumptions range from how to capture maturing loans and securities; what to assume about prepayments; what new lending occurs over the horizon (including replacement of maturing or prepaid positions); and whether to assume that the bank is actively managing its exposures by additional hedging, changes in the credit composition of its portfolios, or restriction of credit supply.

6 The 9-quarter, rather than two year, horizon provides a two year forward horizon after the one-quarter gap  between the “as of” date of the stress test and when robust data on banks’ balance sheets, off-balance sheet exposures, and income are available. 7 7/8  BIS central bankers' speeches  7 European Banking Authority. “2018 EU-Wide Stress Test:  Methodological Note.” November 17, 2017. www.eba.europa.eu/documents/10180/2106643/2018+EU-wide+stress+test+-+Methodological+Note.pdf  8 See,  for instance, International Monetary Fund. Global Financial Stability Report. April 2009. www.imf.org/en/News/Articles/2015/09/28/04/53/sores042109c  9 Board of Governors of the Federal Reserve System. 2009. “Supervisory Capital Assessment Program: Overview  of Results.” May 7, 2009. www.federalreserve.gov/newsevents/files/bcreg20090507a1.pdf 10 The exception to this approach is for the global market shock on trading and counterparty positions, which is  assumed to occur instantaneously in a single quarter. 11 Sales, purchases and acquisitions that have been contractually agreed by but not consummated by the start of  the stress test are incorporated into the projections, however. 12 Board of Governors of the Federal Reserve System. “Dodd-Frank Act Stress Test 2018: Supervisory Stress Test  Methodology and Results.” results-20180621.pdf. June 2018. www.federalreserve.gov/publications/files/2018-dfast-methodology-  13 Daniel K. Tarullo. “Stress Testing after Five Years.” Remarks at the Federal Reserve’s Third Annual Stress  Testing Symposium. June 24, 2014. www.federalreserve.gov/newsevents/speech/tarullo20140625a.htm. 14 In the initial years of CCAR and DFAST stress testing, balance sheet projections made by the banks were used  in the supervisory estimates. 15 Beverly Hirtle, “Structural and Cyclical Macroprudential Objectives in Supervisory Stress Testing.” Federal  Reserve Bank of New York.