Third, if capital requirements are set solely with reference to more ordinary economic circumstances, they will not capture the potential impact of a shock to the value of widely held assets to the financial system as a whole. Fourth, the capacity of both bank management and regulators to understand a firm’s capital position depends on its having good information and quantitative risk-management systems.
Thus, stronger capital standards must be complemented with supervisory tools that incorporate dynamic, macroprudential elements. Two important such tools that have been adopted by the Federal Reserve since the onset of the financial crisis are stress testing and firm-specific capital planning.