Just as a k-percent rule requires a stable relationship between a monetary aggregate and nominal GDP (i.e., stable money velocity), a Taylor Rule needs a stable relationship between the policy rate and financial conditions. BIS central bankers’ speeches  3
In that sense, the SCAP was very much a “lean into the wind” macroprudential exercise. In the current environment, I’d argue that the goals of the supervisory stress testing regime are more diffuse. There are clearly microprudential “safety and soundness” objectives related to sound capital planning, risk identification and capital adequacy at each of the firms participating in the exercise. These are critically important objectives. The focus on the largest, most systemically important banks also seems consistent with the structural macroprudential channel 5/6  BIS central bankers' speeches  —by reducing the risk that these most systemic firms become distressed, we reduce the risk of the externalities that such distress places on other financial institutions and, most important, on consumers and businesses. What is less clear to me is what role cyclical macroprudential concerns play in the evolving stress testing regime. Clearly, the design of the stress test scenarios, which embed a number of counter-cyclical features, is an important channel for “lean against the wind” or “lean into the wind” efforts. However, narrowing the set of firms subject to DFAST supervisory stress testing potentially pushes away from the broader cyclical perspective. Less of the banking industry will be covered by the stress tests and assessments of the strength of the industry will be based on a smaller part of the whole. In pointing out these implications, I am not making any judgments about whether the focus on microprudential and structural macroprudential goals is optimal from a public policy perspective.