test of the fed ’ s supervision of large banks. in these remarks, i will first sketch out how changes in regulation, risk management, the economy, and overall financial stability have prompted alterations to stress tests over the past decade. much of that change has enhanced transparency, which is a founding principle for stress tests. i will then suggest some ways in which the effectiveness of stress testing can be further enhanced with greater transparency. ten years ago, in may of 2009, the fed and the treasury department released the first stress test results under the supervisory capital assessment program ( scap ). at that moment, the u. s. economy was in free fall. the united states had lost an astonishing three million jobs in the previous four months. one significant reason for these losses was that many businesses were severely constrained in their access to funding and found it impossible to predict when that access might improve. the goal of the first test was urgent and simple : to restore confidence in the 19 large banks that then accounted for two - thirds of the assets in the banking system. in fact, simply announcing in march that there would be tests helped stabilize bank finances. that improvement continued after the results in may outlined the quite feasible steps for raising additional capital that the banks would need to take, and did take, to be able to continue lending if adverse conditions continued. challenging conditions did continue, but the stress tests and other actions taken in the first half of 2009 marked a turning point. the recovery from the great recession began in july, as the financial system came back to life, and then steadily strengthened. the principles that made that first test so effective were independence and transparency. for the first time, an independent authority, the federal reserve, would seek to independently assess risks. 1 just as important, the details of that assessment would be shared with the public, an extent of transparency that until then wasn ’ t characteristic of bank supervision but would become the hallmark of the regulatory framework erected in response to the crisis. the first tests relied heavily on banks ’ internal risk models, but they still represented a huge step in independence in providing the public with an assessment of the health and resiliency of large banks. transparency facilitated both market discipline and accountability. the information provided to the public under the scap stress test reinforced the entire enterprise of estimating the capital shortfall faced by major banks. it held the banks accountable for information on their capital adequacy and required them to fill the capital hole. the next big step for

randal k quarles : stress testing - a decade of continuity and change speech by mr randal k quarles, vice chair for supervision of the board of governors of the federal reserve system, at " stress testing : a discussion and review ", a research conference sponsored by the federal reserve bank of boston, boston, massachusetts, 9 july 2019. * * * thank you eric, and thank you to everyone at the boston fed and throughout the system who have contributed to this conference. this gathering comes a few weeks after the announcement of this year ’ s stress test results, so let me begin by recounting the highlights of those results. they show that our financial system remains resilient and that capital planning by banks continues to improve. the largest and most complex banks were tested against a severe hypothetical recession and retained strong capital levels, well above their minimum requirements. they demonstrated the ability to withstand a severe and lasting economic downturn and still be able to lend to households and businesses. additionally, most firms are now meeting the high expectations we have set to make sure capital planning takes into account their specific risks and vulnerabilities. this is an improvement from last year. overall, these results are good news that confirm our financial system is significantly stronger than before the crisis. now let me turn to the purpose of this conference, which is to sharpen our understanding of the experience gained from stress testing and apply these lessons to think about the future. and let me begin by acknowledging that — notwithstanding our openness to learning from the collective experience of all of us in this room — the future of stress testing will, in a number of important ways, necessarily resemble the past. for example, we ’ re still going to have them. over the course of the last 18 months, i have heard overwhelmingly — from academics, from think tanks of every stripe, from banks of every size, from regulatory colleagues both domestic and foreign — that stress tests should continue to be a key element of the federal reserve ’ s supervision of systemically important banks and a key aspect of the fed ’ s efforts to promote financial stability. stress tests should be regular, rigorous, and dynamic. and the banks ’ performance on these tests will continue to be the most risk sensitive and consequential assessment of the affected banks ’ capital requirements. transparency around the stress testing process and results was a fundamental principle of the first stress test and every one that has followed, and it will remain a primary goal. stress tests