by Calculated Risk on 4/08/2013 09:24:00 PM

From Fed Chairman Ben Bernanke: Stress Testing Banks: What Have We Learned?

[T]he banking system is much stronger since the implementation of the SCAP four years ago, which in turn has contributed to the improvement in the overall economy. The use of supervisory stress tests--a practice now codified in statute--has helped foster these gains. Methodologically, stress tests are forward looking and focus on unlikely but plausible risks, as opposed to "normal" risks. Consequently, they complement more conventional capital and leverage ratios. The disclosure of the results of supervisory stress tests, coupled with firms' disclosures of their own stress test results, provide market participants deeper insight not only into the financial strength of each bank but also into the quality of its risk management and capital planning. Stress testing is also proving highly complementary to supervisors' monitoring and analysis of potential systemic risks. We will continue to make refinements to our implementation of stress testing and our CCAR process as we learn from experience.

As I have noted, one of the most important aspects of regular stress testing is that it forces banks (and their supervisors) to develop the capacity to quickly and accurately assess the enterprise-wide exposures of their institutions to diverse risks, and to use that information routinely to help ensure that they maintain adequate capital and liquidity. The development and ongoing refinement of that risk-management capacity is itself critical for protecting individual banks and the banking system, upon which the health of our economy depends.

I was an early advocate of stress testing, and I think these tests played a key role in understanding the impact of the financial crisis on large banks.

Tuesday economic releases:
• 7:30 AM ET, NFIB Small Business Optimism Index for March. The consensus is for a decrease to 90.6 from 90.8 in February.

• At 10:00 AM, The BLS will released the Job Openings and Labor Turnover Survey for February. The number of job openings (yellow) has generally been trending up, and openings were up 8% year-over-year in January.

• Also at 10:00 AM, Monthly Wholesale Trade: Sales and Inventories for February. The consensus is for a 0.5% increase in inventories.