stress capital buffer requirement can provide room to explore a wider range of vulnerabilities to inform riskbased supervision. for example, if the purpose of the exploratory scenario is to inform the board or the public about new or underappreciated risks, the board could explore the impact of a scenario using a different set of variables than the ones it has currently defined in its policy statement. - 10 - additional exploratory stress test scenarios could allow supervisors to better probe the internal risk management of firms and assess whether they are holding sufficient capital for their risks. for example, the 2018 stress test revealed that one firm had highly concentrated counterparty exposures that would materialize under the hypothetical stress scenario. this led to supervisory feedback to that firm and its prompt mitigation of the concern. we should continue to enhance the feedback loop between supervision and stress testing. we can also learn from our international counterparts, who have effectively employed exploratory stress tests. since 2017, the bank of england has run a biennial exploratory scenario designed to explore risks not covered by their annual capital stress test. the results of their exploratory tests are used to improve supervisory feedback related to the risk management of firms. while the results of our stress test are informative and provide a rigorous measure of resilience, the supervisory stress test is not a replacement for a firm ’ s own risk management or its own stress testing processes. large banking organizations should maintain a solid line of sight into their own risks and focus their efforts to capture those risks and determine capital needs. our stress test is designed to provide a consistent measure of risk across firms, and is not a replacement for comprehensive modeling, risk management, and capital planning by the largest banks that enable them to measure and manage their own unique risks. the future evolution of stress testing exploratory scenarios would also allow the board to have more flexibility in its modeling approaches. for example, the board could explicitly model the behavioral response of depositors to losses, allowing for contagion of the type we saw earlier this year, the interaction of - 11 - the broader economy and the banking system under stress, or the transmission of stress through nonbank parts of the financial system. 18 the bank of england ’ s recent stress tests included a set of models to better understand how feedback and amplification channels during a stress event could drive contagion losses and exacerbate the impact of an initial shock. these feedback

single market shock used in the test is a one - time shock to several thousand variables in bank trading books. this is just one realization of a large set of risk factors that determine changes in market values. 16 using additional market shocks see bora durdu, rochelle edge, and daniel schwindt, “ measuring the severity of stress - test scenarios, ” feds notes ( washington : board of governors of the federal reserve system, may 5, 2017 ), https : / / doi. org / 10. 17016 / 2380 - 7172. 1970 and r. roengpitya, n. tarasherv, k. tsatsaronis, and a. villegas, “ bank business models : popularity and performance, ” bank for international settlements working paper no. 682 ( basel : bis, december 2017 ), https : / / www. bis. org / publ / work682. pdf. see william f. bassett and david e. rappoport, “ enhancing stress tests by adding macroprudential elements, ” finance and economics discussion series 2022 - 022 ( washington : board of governors of the federal reserve system, may 2022 ), https : / / doi. org / 10. 17016 / feds. 2022. 022. the global market shock is specified by a large set of risk factors that include, but are not limited to : equity prices, foreign exchange rates, selected - maturity government yields, selected maturities and would help us understand how the trading books and counterparty concentrations of firms would change under a range of financial conditions. this could include testing the exposure of firms to different directional risks, such as a sudden rise or fall in certain asset values, or to an unexpected divergence in values of correlated assets. 17 it is particularly important for us to consider a range of market shocks because some concentrated counterparty exposures may be revealed only under certain scenarios. to advance the goal of improved testing of market risk, last year, for the first time, we introduced an additional, exploratory market shock component. as compared to the global market shock, the exploratory market shock was characterized by a less severe recession with greater inflationary pressures. as we explained in our results disclosure, banks generally looked better under the exploratory market shock, experiencing smaller trading and counterparty losses in the exploratory market shock than under the global market shock. this is