The Federal Reserve’s head of supervision wants to broaden the scenarios in annual stress tests to gauge whether big banks can weather shocks and still keep lending, Bloomberg News reported. This year’s health check featured an “exploratory market shock” to the trading books of the eight biggest banks that involved greater inflationary pressure and rising interest rates. Now, Vice Chair for Supervision Michael Barr says he wants to include more than one such hypothetical scenario in coming tests, starting next year. Barr’s speech is a response to sharp criticism that the Fed’s tests failed to prepare banks for rapid and prolonged interest-rate hikes, highlighting a gap in how agency officials perceive financial risk. Several lenders, including Silicon Valley Bank and First Republic Bank, collapsed earlier this year. “While our stress test is an important measure of the strength and resilience of the banking system, we must recognize that it does have limitations, as does any exercise,” Barr said Thursday at a Federal Reserve Bank of Boston conference on stress testing.
