Executive Summary 

• The Federal Reserve has proposed that annual bank stress-testing scenarios be open to public comment for the first time. 

• Stress testing has evolved from a crisis-era confidence tool into a central, forward-looking pillar of bank supervision that shapes regulatory expectations and market perceptions 

• Opening stress-scenario design to public comment introduces new opportunities for transparency and risk identification but also heightens concerns about predictability and incentives; these developments underscore a broader philosophical question about what stress testing should ultimately achieve. 

Introduction 

The Federal Reserve has proposed that annual bank stress-testing scenarios be open to public comment for the first time.  

Stress testing has become one of the defining features of the post-2008 regulatory landscape. What began as an emergency confidence-building measure during the financial crisis has matured into a recurring supervisory exercise that influences capital planning, investor expectations, and broader perceptions of systemic resilience. Opening stress-scenario design to public comment introduces new opportunities for transparency and risk identification but also heightens concerns about predictability and incentives. The change raises a deeper question: What do we actually want stress testing to be—and what role should it play in modern prudential regulation? 

From Crisis Response to Institutional Norm 

The origins of contemporary U.S. stress testing lie in the 2009 Supervisory Capital Assessment Program (SCAP). Designed in the midst of market turmoil and widespread doubts about bank solvency, SCAP introduced a standardized way to evaluate the resilience of large institutions under acute economic stress. Crucially, it offered transparency at a time when markets were starved for credible information. Those disclosures helped stabilize expectations and restore confidence, demonstrating the value of a consistent, forward-looking framework for assessing capital adequacy. 

Dodd–Frank cemented this approach by establishing annual stress-testing requirements (DFAST) and the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR). Over the ensuing decade, these tests evolved – perhaps unintentionally – from a one-time crisis tool into a permanent feature of supervisory practice. Although later tailoring reforms narrowed the scope, the tests remain central to oversight of the largest and most systemically important banking organizations. In many respects, the annual release of the stress scenario has become a kind of regulatory milestone—an event that both regulators and markets anticipate as an indicator of the risks viewed as most salient. 

Why Stress Tests Matter to Regulators and Investors 

Stress tests matter because they serve as a forward-looking assessment of capital resilience in a way static requirements cannot. For supervisors, the results provide an independent check on whether institutions could absorb losses in a severe downturn. A weak performance can trigger supervisory interventions, restrict capital distributions, or prompt enhanced scrutiny. Stress tests thus function as a dynamic regulatory standard—one that adapts to changing economic conditions and incorporates quantitative judgments that traditional ratios cannot capture.  

Stress test results directly impact bank capital requirements. From these projections, the Federal Reserve calculates how the bank’s common equity tier 1 (CET1) ratio would evolve from the starting point through the worst quarter of the scenario. The key number is the maximum decline in that CET1 ratio during the stress period. 

That decline is then used to set the bank’s stress capital buffer (SCB). The SCB is equal to the size of that projected CET1 drop plus a fixed 2.5-percent buffer, with a small additional amount if the bank plans to increase dividends. A bank that shows a large capital decline under stress receives a larger SCB, while a bank that proves more resilient receives a smaller SCB. 

Because the SCB is added on top of regulatory minimum capital requirements, poor stress-test performance directly results in higher total mandatory capital levels, while strong performance reduces them. In this way, the stress test serves as a forward-looking measure of vulnerability, and the SCB translates that vulnerability into a binding, institution-specific capital requirement for the coming year. 

The tests also matter internally. Large institutions use the scenarios to benchmark their own models, identify vulnerabilities, and integrate adverse conditions into capital-planning decisions. Even when supervisory models differ from internal ones, the act of preparing for the stress test forces banks to engage with a shared, severe scenario, which can reveal weaknesses that day-to-day risk management might overlook. 

Investors, meanwhile, treat the results as a public signal about bank health and supervisory confidence. The transparency of the process—unusual for prudential regulation—allows markets to compare institutions on standardized terms. In practice, stress tests influence how analysts view capital adequacy, how equity markets price risk, and how creditors assess the credibility of loss-absorbing capacity. In this sense, stress tests are not merely a supervisory exercise; they are a communication tool that shapes market discipline. 

Strengths and Frictions in the Current Framework 

The success of stress testing does not mean the process is without shortcomings. Stress tests necessarily rely on modeling frameworks that simplify complex institutions—and assume that a single standard can apply to a wide panoply of participants. Much of this modeling remains opaque to prevent firms from gaming the results, but the opacity can leave banks uncertain about the drivers of projected losses, complicating long-term planning. 

Scenario design presents its own challenges. A scenario must be both severe enough to meaningfully test resilience and plausible enough to reflect real-world conditions. Too mild a scenario offers little insight; too contrived a scenario risks distorting incentives by effectively encouraging firms to optimize around a single set of hypothetical conditions. Regulators have long had to navigate this tension, and the annual scenarios often reflect an implicit compromise between historical precedent, emerging risks, and supervisory caution. 

Stress testing can also promote convergence in risk management. Because the tests establish a canonical view of stress, institutions may adjust their portfolios in anticipation of the scenario rather than preparing for a broader range of risks. This can inadvertently shift vulnerabilities elsewhere in the financial system, particularly toward less-regulated markets. 

And while stress tests have become more sophisticated, they still struggle with emerging risks, or risks with limited historical precedent. Cyber events, rapid shifts in market structure, or novel financial products often defy the data-driven modeling approach that stress tests depend on, leaving gaps in coverage. 

Opening the Scenarios to Public Comment 

Against this backdrop, the Federal Reserve’s proposal to open stress-testing scenarios to public comment represents a significant shift. For over a decade, stress-scenario design has remained the exclusive domain of supervisors, with limited explanation of how specific assumptions were chosen. Introducing a public comment process could enhance the legitimacy and robustness of scenario design by incorporating insights from academics, market participants, risk managers, and others who may identify vulnerabilities that supervisory models do not fully capture. 

Yet greater transparency carries its own risks. The more predictable the scenarios become, the easier it is for institutions to tailor portfolios to meet the test, potentially undermining the goal of assessing true resilience. Public comment may also intensify debate over the severity and structure of the scenarios, especially among firms whose business models weight particular exposures. A more open process also could lead to greater year-to-year variation as regulators sift through external input, thereby complicating capital-planning expectations. 

The proposal therefore raises an important question: Should stress testing be primarily a supervisory diagnostic tool insulated from market pressures, or a more collaborative exercise drawing on public expertise? The answer will shape not only the scenarios themselves but the broader role of stress testing in the regulatory ecosystem. 

What Stress Testing Is—and What It Should Be 

At its core, stress testing is not just a technical procedure. It represents a philosophy about how the state should manage financial risk. Some view stress tests as a measurement tool—a structured attempt to quantify losses under adverse conditions. Others see them as a communication device that signals supervisory expectations and influences behavior. Still others treat them as a deterrent, a mechanism that disciplines institutions by imposing severe, countercyclical pressure. In practice, stress tests also operate as a coordination mechanism, aligning regulators, banks, and investors around shared definitions of resilience. 

The move to open scenarios to public comment makes these philosophical tensions more visible. More transparency enhances accountability but risks predictability. More participation improves insight but complicates speed and discretion. Supervisors must now navigate these tradeoffs with the public directly, deciding what balance of roles will best support systemic stability in a financial system that continues to evolve. 

Conclusion 

Stress testing has become a cornerstone of post-crisis financial regulation, shaping supervisory oversight, informing market expectations, and improving risk management across the banking sector. The proposal to solicit public comment on the scenarios marks a potentially transformative shift—one that could enhance transparency and invite broader participation but also raises questions about incentives, supervisory discretion, and the purpose of the tests themselves. As regulators consider how to implement this change, they must confront a deeper question about what stress testing should ultimately achieve and how it can best contribute to long-term financial resilience.