Stress testing is "a cornerstone" in Federal Reserve's supervision and the mission to maintain financial stability, Chair Jerome Powell said on Tuesday. In a speech recorded before the opening of a conference in Boston on the issue, he expressed admiration to the results in the past ten years and praised the "critical function" of the system but also underscored the process must "evolve." The central bank and economic policy makers have helped restore confidence and stabilize banks, the top supervisor added.
"Since 2009, large banks have added more than $800 billion in common equity capital, giving them a much thicker cushion to deal with losses. Banks have gotten much better at assessing and managing their risks, effectively tracking commitments across their organizations, anticipating capital needs, and planning for different scenarios," Powell stated. He asserted the focus must be on unexpected risks as much as on expected ones and that stress tests need to be adapted every year to include "even quite unlikely scenarios" so as not to become "a compliance exercise, breeding complacency."
