FedFin Assessment: New Fed Stress Tests are a lot Like the Old Fed Stress Tests

In this report, we assess the strategic and policy implications of the Fed’s new stress-test regime.  Released today, it incorporates new “exploratory” scenarios previewed by Vice Chair Barr as a response to the significant stress-test omissions laid bare in the March banking crisis.  However, these exploratory tests will not directly factor into the SCB, which will also be calibrated to current capital rules since the banking agencies are now most unlikely to finalize these in time for SCB calculations later this year.  We nonetheless expect bank supervisors to run bank results against internal models premised on new capital requirements, using supervisory discretion to address any capital shortfalls they feel warrant distribution restrictions regardless of formal test results.  Similarly, we think supervisors will take near-term action if any of the exploratory scenarios points to near-term risk.