Bank Stress Test

AAA

DEFINITION of 'Bank Stress Test'

An analysis conducted under unfavorable economic scenarios which is designed to determine whether a bank has enough capital to withstand the impact of adverse developments. Stress tests can either be carried out internally by banks as part of their own risk management, or by supervisory authorities as part of their regulatory oversight of the banking sector. These tests are meant to detect weak spots in the banking system at an early stage, so that preventive action can be taken by the banks and regulators.

INVESTOPEDIA EXPLAINS 'Bank Stress Test'

Stress tests focus on a few key risks – such as credit risk, market risk, and liquidity risk – to banks' financial health in crisis situations. The results of stress tests depend on the assumptions made in various economic scenarios, which are described by the International Monetary Fund as "unlikely but plausible." Bank stress tests attracted a great deal of attention in 2009, as the worst global financial crisis since the Great Depression left many banks and financial institutions severely under-capitalized.

RELATED TERMS
  1. Risk Assessment

    The process of determining the likelihood that a specified negative ...
  2. Bank Examination

    An evaluation of the safety and soundness of a bank. The primary ...
  3. Risk Management

    The process of identification, analysis and either acceptance ...
  4. Stress Testing

    A simulation technique used on asset and liability portfolios ...
  5. Scenario Analysis

    The process of estimating the expected value of a portfolio after ...
  6. Back-To-Back Deductible

    An insurance policy deductible that is the same as the coverage ...
Related Articles
  1. Credit & Loans

    Banking Stress Tests: Would Yours Pass?

    In weaker economic times, banks may be tested by the government to see how safe they are.
  2. Retirement

    The History Of The FDIC

    Find out why this corporation was developed and how it protects depositors from bank failure.
  3. Retirement

    CDIC Protects Canadians From Bank Failure

    Bank failures can happen in Canada, but many deposits are insured. Find out what's covered.
  4. Options & Futures

    Bank Failure: Will Your Assets Be Protected?

    The SIPC and FDIC insure against personal financial ruin when banks or brokerages go belly up.
  5. Options & Futures

    Avoid Future Shock By Protecting Your Portfolio With Futures

    Worried about protecting your portfolio of diversified stocks and assets? Using futures with correct strategies can help.
  6. Investing

    How Swaptions Can Reduce Risk in Portfolios

    How can investing in Swaptions reduce risk in portfolios.
  7. Investing

    What's a Debit Note?

    A debit note is a document used by a seller to inform a purchaser of a dollar amount owed. As the name indicates, it is a note from the seller that a debit has been made to the purchaser’s account. ...
  8. Investing Basics

    Understanding Risk Averse Investing

    Risk averse describes a low level of risk an investor is willing to accept on his investments. An investor who is risk averse prefers little risk and is willing to accept a lower return because ...
  9. Investing

    What's Capitalization?

    Capitalization has different meanings depending on the context.
  10. Investing Basics

    Are You Investing With A Purpose?

    We all appreciate having a wide variety of investing choices, but a random collection of investments does not make an investing plan.

You May Also Like

Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  3. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  4. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  5. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  6. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
Trading Center