Fed's Goolsbee: I haven't seen a recession, hopeful we can avoid it

post: FED'S BARR: THE FED ARE DEVELOPING ADDITIONAL SCENARIOS FOR THE 2024 STRESS TESTS FOR LARGE BANKS.Multiple Scenarios in Stress Testing Thank you for the opportunity to speak today. I'm here to offer my thoughts on the next steps for stress testing, and in particular why using multiple exploratory scenarios will help improve our understanding of risk in the banking system.1 The stress test as we know it today grew out of the 2009 Supervisory Capital Assessment Program, or SCAP, conducted in the heat of the global financial crisis. In the winter of 2008–09, markets had lost confidence in banks amid wide uncertainty about the future path of the economy and the losses banks could face. This prompted the Federal Reserve and Treasury to conduct a stress test to determine the health of the 19 largest banks under a severely adverse economic scenario and to publish the findings. The release of the results provided transparency about the status of the largest banks, made it easier for firms to re-capitalize themselves, and restarted the provision of credit to the economy that began the process of recovery. Following the success of this stress test, Congress mandated in the Dodd-Frank Act that the Federal Reserve conduct an annual stress test of large banks to determine whether those banks have sufficient capital to absorb losses under adverse economic conditions.2 And today this test—as well as the data collection that supports it—is one of our primary tools to assess and to help ensure banks' resilience, in good times and bad. During periods of economic or financial uncertainty, stress tests can provide critical assessments of bank resilience to supervisors, the market, and policymakers. This transparency helps enable markets to function better in times of stress.3 Outside of stressful periods, stress tests can help to assess sufficient capitalization and improve supervisory insight into risks. The stress test also can provide transparency into the build-up of risks across banks. In our experience, the test results have given supervisors valuable information to provide feedback to individual firms and helped the Board assess the stability of the financial system. A recent study confirms this experience, finding that banks subject to the stress test were less exposed to common systemic risks.4 In addition, the stress test helps to make capital requirements less susceptible to gaming by firms and therefore more likely to be set at adequate levels.5 This is so because the design of the scenario can change based on our observations of growing risks in the system. Th