Sheila Bair, former chair of the Federal Deposit Insurance Corporation, argues that US bank stress tests, initially vital for public confidence during the 2009 financial crisis, have devolved into a misleading ritual. The Federal Reserve's current framework, tied to capital requirements since 2020, has become adversarial, with banks lobbying for weakened standards. For instance, the leverage ratio component was dropped, and requirements for lending capacity and shareholder distributions were diluted.

Bair points to the Fed's increasing disclosures of its models, akin to "giving the banks the answers before they take the test," and a noticeable decline in calculated capital losses under stress scenarios. The latest test showed only a 1.6 percentage point decline in aggregate capital ratio, the lowest ever, under severe economic conditions. Bair finds this "hard to believe."

The tests also fail to reflect current risks like high inflation and interest rates, cyber attacks, or AI fraud. They dilute market discipline and create a "too-big-to-fail" mentality, discouraging independent analysis and putting the Fed in an awkward position if a tested bank falters. Bair advocates for scrapping the current framework, integrating tests into a dynamic supervisory process with diverse scenarios, and divorcing them from capital requirement setting.