Michael S Barr: Preserving the dynamism and credibility of stress testing
Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the Peterson Institute for International Economics, Washington DC, 25 September 2025.
The views expressed in this speech are those of the speaker and not the view of the BIS.
Thank you for the opportunity to speak to you.
Today, I would like to discuss a vital tool for supervising the safety and soundness of the largest banks and preserving the stability of our financial system. I was there, at the Treasury Department in 2009, when stress testing was first used in the United States in the heat of battle, an ad hoc measure to reverse a loss of confidence in U.S. banks that was a major force then driving the Great Recession. By examining how the balance sheets of banks would be affected by a worsening of financial and economic conditions, this process was intended to reveal weaknesses that could threaten the solvency of banks and prevent them from playing their central role in the economy.
Stress testing ultimately succeeded in helping to restore confidence during the crisis, and in the aftermath this battle-tested tool became a formal and integral part of the effort to repair the ensuing damage and strengthen the banking system. Stress testing has continued to evolve in the years since then to maintain that strength and help limit the chances of another devastating financial crisis. Stress testing changed as its purpose changed from wartime to peacetime-from mitigating the crisis to preserving safety, soundness, and stability. It has changed as banks and regulators learned more about how stress testing works in practice and as part of an otherwise evolving supervisory and regulatory framework for banks that must necessarily adjust as finance itself evolves.