stanley fischer : supervisory stress testing of large systemic financial institutions speech by mr stanley fischer, vice chair of the board of governors of the federal reserve system, at the sveriges riksbank macroprudential conference, stockholm, sweden, 24 june 2015. * * * it ’ s a pleasure to take part in the riksbank macroprudential conference and i thank the organizers for inviting me to participate in the conference, and particularly in this panel on stress testing. stress testing has become a cornerstone of a new approach to regulation and supervision of the largest financial institutions in the united states. the federal reserve ’ s first supervisory stress test was the supervisory capital assessment program, known as the scap. conducted in 2009 during the depths of the financial crisis, the scap marked the first time the u. s. bank regulatory agencies had conducted a supervisory stress test simultaneously across the largest banking firms. the results clearly demonstrated the value of simultaneous, forward - looking supervisory assessments of capital adequacy under stressed conditions. the scap was also a key contributor to the relatively rapid restoration of the financial health of the u. s. banking system. the fed ’ s approach to stress testing of the largest and most systemic financial institutions has evolved since the scap, but several key elements persist to this day. 1 these elements include, first, supervisory stress scenarios applicable to all firms ; second, defined consequences for firms deemed to be insufficiently capitalized ; and third, public disclosure of the results. the fed has subsequently conducted five stress test exercises that built on the success of scap, while making some important improvements to the stress test processes. the first key innovation was the development of supervisory models and processes that allow the fed to evaluate independently whether banks are sufficiently resilient to continue to lend to consumers and to businesses under adverse economic and financial conditions. this innovation took place over the course of several exercises and was made possible by the extensive collection of data from the banks. these data have allowed supervisors to build models that are more sensitive to stress scenarios and better define the riskiness of the firms ’ different businesses and exposures. the second innovation since the scap was the use of the supervisory stress test as a key input into the annual supervisory evaluation of capital adequacy at the largest bank holding companies. the crisis demonstrated the importance of forward - looking supervision that accounted for the possibility of negative outcomes. by focusing on forward - looking poststress capital ratios, stress testing provides an assessment

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