Van Loo on Stress Testing Governance

Rory Van Loo (Boston University – School of Law; Yale ISP) has posted “Stress Testing Governance” (Vanderbilt Law Review, Vol. 75, No. 553, 2022) on SSRN. Here is the abstract:

In their efforts to guard against the world’s greatest threats, administrative agencies and businesses have in recent years increasingly used stress tests. Stress tests simulate doomsday scenarios to ensure that the organization is prepared to respond. For example, agencies role-played a deadly pandemic spreading from China to the United States the year before COVID-19, acted out responses to a hypothetical hurricane striking New Orleans months before Hurricane Katrina devastated the city, and required banks to model their ability to withstand a recession prior to the economic downturn of 2020. But too often these exercises have failed to significantly improve readiness for the subsequent crises. This Article shows that stress tests are used more widely than is commonly assumed, reaching well beyond financial regulation. It then argues that administrative stress tests should be seen as potentially powerful tools for administrative governance, but ones that suffer from significant shortcomings as currently deployed. Most notably, stress tests lack adequate transparency, oversight, and imagination. Also, they are too often voluntary for businesses and agencies whose performance failures could have great societal ramifications. By depriving stakeholders of crucial information about organizational readiness, these shortcomings weaken the nation’s ability to prevent and prepare for disasters. Preparing for disasters will only become more important as technologies transform everything from stock trading to elections and climate change creates more volatile weather. With improved design and wider deployment, stress tests have the potential to become a central tool for public and private accountability in an era of escalating societal risks.