When I think about volatility in stress testing, I want to distinguish what I consider to be useful variation in the tests, in the form of exploration of salient risks, from what I consider to be less useful variation, in the form of unexpected swings in capital requirements that don’t have any particular relationship to changing risks at individual firms.
In addition, one source of volatility in the tests comes from the fact that banks are forced to do their capital planning before they get the results of our tests. I will address each of these concerns in turn.