US CPI Preview: Fed on the Fence Leaves Volatility Potential

Thank you for the invitation to join you. Given the recent conclusion of the Board's stress test, it seems timely to share my thoughts on the stress testing program. In the past, I have noted reservations about the stress testing process, so today I'd like to discuss in greater detail the benefits, challenges, and issues I would like to see resolved as the stress testing program evolves in the future. Earlier this summer, the Board announced the results of the supervisory stress tests. At a high level, all 31 banks subject to the test remained above their minimum common equity tier one (CET1) capital requirements from the hypothetical recession scenario.3 Under this scenario, banks would have absorbed projected hypothetical losses of nearly $685 billion, and would have experienced an aggregate CET1 capital decline of 2.8 percent.4 The hypothetical scenario included a 40 percent decline in commercial real estate prices, a substantial increase in office vacancies, a 36 percent decline in house prices, a spike in unemployment to a peak of 10 percent, and related declines in economic output.5 This year also saw the introduction of "exploratory" stress scenarios, which included two different funding stress scenarios, and for a subset of banks, included two trading book loss scenarios.6 The Board's press release announcing the results reported that large banks are well positioned to weather a severe recession and remain above minimum capital requirements.7 More recently, the Fed announced the final individual capital requirements for all large banks, effective on October 1, 2024.8 The firm-specific capital requirements are "informed by" the stress test results, and include a 4.5 percent minimum capital requirement, a stress capital buffer that is set at a minimum of 2.5 percent, and if applicable, a capit post: FED'S BOWMAN: CONCERNS FOR STRESS TESTS INCLUDE VOLATILITY & TRANSPARENCY.