Published: July 18, 2013
Stress testing of large bank holding companies in the United States — a valuable exercise used to determine regulatory capital and liquidity planning at these institutions — should be adapted to be made more useful for financial stability monitoring. (Working Paper no. 13-10)
Stress testing, which has its roots in risk management, should be adapted to support financial stability monitoring and to incorporate the interconnections and dynamics of the financial system. Since the 2008 financial crisis, bank supervisors have honed their financial stability monitoring tools and significantly expanded the use of stress testing in the supervision of the largest financial institutions. This article describes areas in which further research could contribute to the development of best practices in stress testing and how bank supervisory stress tests can be made more useful for macroprudential supervision. We discuss both near-term and longer-term objectives.