Bank Stress Test


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.

BREAKING DOWN '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.

  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. Contagion

    The spread of market changes or disturbances from one region ...
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