the scap include : a common stress scenario was applied to each of 19 large bank holding companies ( bhcs ). this stress scenario was applied in a consistent manner across these banks. the test was applied at the detailed trading book and banking book level, with the expected loss experiences based upon the particular characteristics of the portfolio being examined. so, for example, evaluation of a residential mortgage portfolio might include detailed factors such as fico scores and geographic distribution of the mortgages. this means that estimated potential losses under the stress scenario bis central bankers ’ speeches vary across banks not just because of differences in overall portfolio composition, but also because of differences in asset quality within particular asset classes. a minimum capital standard was applied after two years of stress and with appropriate reserves at the end of the two - year period. the minimum capital standard was set at 4 percent of tier i common and 6 percent of tier i capital. estimated potential losses were compared with the starting capital level and the estimated resources expected to be generated by the ongoing business – referred to as pre - provision net revenue ( ppnr ) – in order to determine the capital needed to meet the minimum capital standard. details of the test were disclosed on a bank - by - bank basis using a template that the federal reserve established. this common template ensured comparability across the 19 bhcs and ensured that the federal reserve controlled the message, not the banks. in contrast, while ccar had an embedded stress test, the key attributes of the ccar are quite different : the purpose was to assess the bhcs ’ capital planning processes to ensure that the bhcs have good capital plans in place. stress tests were applied by individual banks as part of this exercise. we set the main scenario that the banks must use, and the banks were required to apply the stress test in the manner they deemed appropriate in assessing their capital adequacy. supervisors used independent quantitative techniques both as a check on firm estimates and to assist in their evaluation of the firms ’ tools and processes. we evaluated their efforts in terms of : 1 ) how the stress test is applied, 2 ) what this implies in terms of capital adequacy, and 3 ) their capital plans and requests to pay dividends and / or conduct share repurchase programs. our evaluation of their capital planning processes and their requests to make capital disbursements was based mainly on three factors : 1 ) capital adequacy, 2 ) the quality of the capital

we were making an “ up ” or “ down ” decision per their requests. either we “ objected ” or we “ did not object. ” we want banks to have good capital planning processes and make intelligent decisions with respect to capital. we don ’ t want to determine their capital actions or what their distributions should be. they need to be able to do this. fifth, with respect to disclosure, this decision was left to individual firms. in some cases, banks disclosed whether we objected or not to their plans for distributions, while in other cases they simply announced their intention with regard to future capital distributions. so what have been the lessons from our stress test exercises? one key issue during the financial crisis was the unwillingness of banks to proactively raise capital so they would be better prepared to withstand a “ bad state of the world ” scenario should that transpire. banks didn ’ t want to do this for two reasons. first, capital raises might signal that they were, in fact, weak. second, the capital raises would be dilutive. in particular, in many cases the expected share price would be higher without dilution even admitting the possibility of a “ bad state of the world ” scenario. the problem with this approach was that each individual bank ’ s decision not to raise capital to protect against the “ bad state of the world ” scenario increased the likelihood of the “ bad state of the world ” scenario. there was an important externality. if a bank raises additional capital, it doesn ’ t just make its own bank stronger, it also makes the entire banking system more stable. yet it reaps only a portion of these benefits. this was the collective action problem that the scap was designed to remedy. perhaps, i can best illustrate the problem via two figures. in figure 1, banks have sufficient capital. the mean value of capital is well above zero, the distribution is narrow, and none of the distribution falls below zero – everyone believes the bank is solvent. in figure 2, losses push the distribution of capital to the left and uncertainty about the value of the assets widens the distribution. thus, unlike the case in figure 1, a portion of the distribution falls below zero. the bank may be insolvent. thus, the bank is likely to encounter funding difficulties. the point of the scap was to push the probability distribution back to the right by adding capital – and to narrow it by creating more certainty about how much capital the banks need. by moving