Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, talked about stress testing at the 2011 U.S. Monetary Policy Forum:
"I would like to close with some general comments on the use of stress tests. As I have said, they have proven their usefulness in the crisis. Quantifying the risks at large financial institutions is a complex and costly process that is vulnerable to manipulation. A disciplined and well-organized supervisory process for validating those assessments strikes me as well worth the costs. Stress tests are not a panacea, however. In a sense they are only as good as the imagination of the scenario designers, who need to resist the temptation to dismiss extreme scenarios as too far-fetched or focus too much attention on preparing for the last war.
"One critical question about stress tests is whether or not to disclose the results, and if so, at what level of detail. A good case can be made for transparency; stress tests provide quantitative assessments that are forward-looking, independently certified and methodologically comparable across institutions. On the other hand, there can be good reasons to restrict the release of bank-specific supervisory information. As is often the case in financial regulation, the answer is not as obvious as it might seem." (footnote omitted)
