Under what circumstances does one tell a firm that is still well above its regulatory capital requirement that it must do a share issue that will be helpful for the economy as a whole, but highly dilutive to its existing equity holders? This discussion brings us to the role of the now ongoing stress-testing framework for large financial institutions.
As you may know, the Federal Reserve has been conducting annual stress tests and capital-planning reviews of the 18 largest banks under the auspices of its Comprehensive Capital Analysis and Review (CCAR) program, and is adding 12 more firms this year, consistent with requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.4 During normal times, when banks are relatively healthy, the CCAR process functions as an important complement to more conventional capital regulation and, like capital regulation, it can be thought of as an ex ante instrument to increase the general resilience of the banking system to as-yet-unknown shocks.5 I believe that it has been a very valuable addition to our toolkit in this regard, and will continue to be so.