of a firm ’ s capital adequacy that is complementary to regulatory capital ratios, which reflect the firm ’ s performance to date. although we view this new approach to capital assessment as a significant improvement over previous practices, we are aware that the true test of this new regime will come only if another period of significant financial or economic stress were to materialize - which is to say that we will not have a strong test of the effectiveness of stress testing until the stress tests undergo a real world stress test. the same comment, mutatis mutandis, applies to the overall changes in methods of bank regulation and supervision made since september 15, 2008. the dodd - frank act requires the fed to conduct a supervisory stress test for bank holding companies with $ 50 billion or more in total consolidated assets, and for nonbank financial companies designated by the financial stability oversight council ( fsoc ) for fed supervision. bis central bankers ’ speeches third, supervisory stress testing has been on the leading edge of a movement toward greater supervisory transparency. since the scap, the fed has steadily increased the transparency around its stress testing processes, methodologies, and results. before the crisis, releasing unfavorable supervisory information about particular firms was unthinkable - for fear of setting off runs on banks. however, the release of the scap results helped to calm markets during the crisis by reducing uncertainty about firm solvency. indeed, only one of the 10 firms deemed to have a capital shortfall was unable to close the identified gap on the private markets. our experience to date has been that transparency around the stress testing exercise improves the credibility of the exercise and creates accountability both for firms and supervisors. that said, too much transparency can also have potentially negative consequences, an idea to which i will turn shortly. with the benefit of five years of experience, the fed is continuing to assess its stress testing program, and to make appropriate changes. examples of such changes to date include the assumption of default by each firm ’ s largest counterparty and the assumption that firms would not curtail lending to consumers and businesses, even under severely adverse conditions. as part of that assessment process, we are also currently seeking feedback from the industry, market analysts, and academics about the program. supervisory stress testing is not a static exercise and must adapt to a changing economic and financial environment and must incorporate innovations in modeling technology. work is currently underway on adapting the stress testing framework to accommodate firms that have not traditionally been subject to these

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