11 In this approach, each firm would have a buffer requirement derived from our annual stress test, taking the place of the existing buffer requirement, which is the same for all firms. This change would make the capital regime more risk-sensitive by using firm-specific information on risks drawn from the stress test.
Using the supervisory stress test to guide a risk-sensitive capital regime seems far preferable to reliance on a bank’s internal models, which have proven problematic as a basis for risk-based capital requirements under Basel II. 12 The progressive implementation of this capital regime has substantially increased the resiliency of the largest banks.