More broadly, developing practical ways to model realistic interactions among banks and other financial institutions and between the financial and real sectors of the economy would be important advances. Transparency of Process and Results The next element we identified as contributing to the SCAP’s success as a macroprudential exercise was transparency, both of the process and, especially, of the results. The SCAP was groundbreaking because it disclosed firm-specific supervisory estimates in detail, including loss amounts and rates on different types of loans, projections of net revenues, and the amount of capital each firm would have to raise to meet publicly disclosed supervisory targets ratios. These disclosures formed the template for subsequent DFAST and CCAR stress test results. Current stress test disclosures deliver not just insight into individual banks’ ability to withstand stressful economic outcomes, but also provide a broader perspective about the exposure of different segments of bank lending, securities and other activities to adverse economic and financial market developments. These segment-level results, aggregated across banks, are important because they have the potential to serve as public warning signals about over-heating or a build-up of risk that can supplement other cyclical macroprudential analysis. While the transparency of the supervisory stress test results was a groundbreaking element of the SCAP in 2009, subsequent discussion has focused largely on the transparency of the process of generating the results, in particular, information about supervisory stress test models.

In that sense, the SCAP was very much a “lean into the wind” macroprudential exercise. In the current environment, I’d argue that the goals of the supervisory stress testing regime are more diffuse. There are clearly microprudential “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. The focus on the largest, most systemically important banks also seems consistent with the structural macroprudential channel 5/6  BIS central bankers' speeches  —by reducing the risk that these most systemic firms become distressed, we reduce the risk of the externalities that such distress places on other financial institutions and, most important, on consumers and businesses. What is less clear to me is what role cyclical macroprudential 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. In pointing out these implications, I am not making any judgments about whether the focus on microprudential and structural macroprudential goals is optimal from a public policy perspective.