To serve its important financial stability purpose, stress testing must never become static. As the financial system evolves, with the creation of new products and new correlations among asset price movements, the supervisory model must account for these changes. And as salient risks to the financial system arise, the scenarios must test for these new risks.
The revised framework is highly complex and makes its understanding and implementation a great challenge, not only to regulators but also to the regulated community. Basel 2, for example, assumes that discipline by the markets and by supervisors is beneficial. Yet, as we have seen particularly, over the last five years, both markets and governments can, and do, fail.