Fed sees need for more varied bank stress tests

Fed considers adding new stress test scenarios to assess a wider range of risks facing banks.

Federal Reserve Vice Chair for Supervision Michael Barr said that multiple 'exploratory' scenarios should be implemented in future stress tests to anticipate a wider range of risks that could affect the financial system.
These exploratory scenarios are intended to identify underlying weaknesses and improve how regulators supervise large banking firms, without being used to set a firm's capital requirements.
The initiative comes from recognizing potential limitations in the current stress testing process, which primarily focuses on how banks perform under a hypothetical severe recession.
The additional scenarios could test for various types of economic and market stress, potentially helping tougher internal risk management within financial institutions.
The new testing framework, including early development of macroeconomic scenarios and market shocks, will be introduced in the 2024 stress test according to Barr.