Document Type

Book Chapter

Publication Date

2022

DOI

https://doi.org/10.1017/9781108903011.015

Abstract

In the spring of 2009, the United States was mired in the greatest recession it had faced since the Great Depression. In March, the Dow Jones Industrial Average had fallen to 6,594.44, a total decline of 53.4 percent from its peak in the fall of 2007. The official unemployment rate was over 9 percent and still trending upward, eventually exceeding 10 percent. With the support of Congress, the Federal Reserve (the Fed) and other financial regulators had launched an array of initiatives to contain the fallout of what had become a global financial crisis. These interventions, including a massive recapitalization of US banks and the effective elimination of large, independent investment banks, had succeeded in stabilizing much of the financial system, but full functionality remained elusive. The crisis had revealed significant deficiencies in the banks’ risk management systems and the capacity of regulators to detect those weaknesses. Fear and distrust remained the order of the day.

Against this background, the Federal Reserve and other bank regulators took a gamble. On May 7, 2009, they publicly announced the results of the Supervisory Capital Assessment Program (SCAP). As then-chairman Ben Bernanke explained, “the SCAP marked the first time the US bank regulatory agencies had conducted a supervisory stress test simultaneously across the largest banking firms” (Bernake, 2013). The Fed further deviated from tradition in its decision to disclose the results of the SCAP. In providing an unprecedented level of detail regarding the methodology and inputs used in reaching those results, the Fed challenged the assumption that bank supervision should always be shrouded behind a thick veil of secrecy. Both gambles paid off. As Bernanke later observed: “The SCAP stands out ... as one of the critical turning points in the financial crisis. It provided anxious investors with something they craved: credible information about prospective losses at banks” (Bernake, 2013).

Disciplines

Banking and Finance Law | Finance | Health Economics | Law

Comments

This material has been published in "Handbook of Financial Stress Testing", edited by J. Doyne Farmer, Alissa M. Kleinnijenhuis, Til Schuermann, and Thom Wetzer. This version is free to view and download for private research and study only. Not for re-distribution or re-use.

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