Introduction

Jing Zhang

Stress testing, regulatory or internally driven, was not new to banks before the onset of the financial crisis in 2007–08. Banks had been routinely conducting capital adequacy assessment and planning long before the crisis. However, the financial crisis made starkly bare the deficiencies in these practices and processes, as well as the opaqueness of risk in the balance sheet. In 2009, at the height of the crisis, the US Treasury and the Federal Reserve initiated the Supervisory Capital Assessment Program (SCAP) to assess the capital adequacies of the largest US bank holding companies (BHCs). These banks were subjected to a rigorous review, which included stress testing, to measure the potential loss and resulting capital shortfall. The results of the programme were announced publicly. Banks deemed inadequately capitalised were required to raise capital in the marketplace, with the US Treasury acting as a backstop. The financial markets and the public reacted positively to the programme and disclosure, leading to the gradual restoration of public confidence in the US banking system.11See Ben S. Bernanke, 2013, “Stress Testing Banks: What Have We Learned?”, available at http://www

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