Bank Stress Test

What is a 'Bank Stress Test'

A bank stress test is 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.

RELATED TERMS
  1. Stress Testing

    A simulation technique used on asset and liability portfolios ...
  2. Supervisory Capital Assessment ...

    A financial stress test conducted by the Federal Reserve System ...
  3. Business Banking

    A company's financial dealings with an institution that provides ...
  4. Macroprudential Analysis

    A method of economic analysis that evaluates the health, soundness ...
  5. Bank

    A financial institution licensed as a receiver of deposits. There ...
  6. Bankers' Bank

    A special type of bank that is created by a group of banks. Bankers' ...
Related Articles
  1. Markets

    U.S. Banks Pass First Part of Annual Fed Stress Test (JPM, C)

    The 33 U.S. banks tested to ensure they have enough capital to weather a severe economic downturn all passed.
  2. Managing Wealth

    Banking Stress Tests: Would Yours Pass?

    In weaker economic times, banks may be tested by the government to see how safe they are.
  3. Financial Advisor

    Top Tips for Beating Money Stress

    The leading cause of stress in America is money. Here are five tips to help you reduce your financial worry.
  4. Managing Wealth

    Retail Banking Vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers.
  5. Personal Finance

    4 Ways Companies Can Relieve Workplace Stress

    Workplace stress can cost companies tons of money in lost productivity and absenteeism. Some of that is out of their control, but often they are the cause.
  6. Financial Advisor

    Stressed Out? How Advisors Can Deal with It

    Financial advisors face loads of stress, especially during troubled times. Here's how to deal with the job's stresses and gain a competitive edge.
  7. Managing Wealth

    What Is The Bank For International Settlements?

    Get the scoop on the structure and functions of the oldest global financial institution.
  8. Investing

    What's a Correspondent Bank?

    A correspondent bank is a bank that acts on behalf of another bank, usually a foreign bank.
  9. Markets

    Why the Fed Says Banking Functions Are Too Complex (JPM, BAC)

    Discover why the Federal Reserve may raise capital requirements for America's largest banks or move to limit complex derivative contracts.
  10. Markets

    A Brief History of U.S. Banking Regulation

    From the establishment of the First Bank of the United States to Dodd-Frank, American banking regulation has followed the path of a swinging pendulum.
RELATED FAQS
  1. How stressful is the typical corporate finance job?

    Learn more about careers in corporate finance, the stress associated with those jobs and why investment bankers feel the ... Read Answer >>
  2. What is stress testing in Value at Risk (VaR)?

    Discover the difference between Value at Risk, or VaR, and stress testing, and learn how the two concepts might be used together ... Read Answer >>
  3. What average annual growth rate is typical for the banking sector?

    Learn the typical average annual growth rate for the banking sector and why regulatory requirements have a profound effect ... Read Answer >>
  4. What factors are the primary drivers of banks' share prices?

    Find out which factors are most important when determining the share price of banks and other lending institutions in the ... Read Answer >>
  5. What are the risks associated with investing in the banking sector?

    Find out about the risks associated with investing in the banking sector including liquidity, risk management, consumer protection ... Read Answer >>
  6. What economic indicators are important to consider when investing in the banking ...

    Find out which economic indicators are most useful for investors in the banking sector, especially those influenced by central ... Read Answer >>
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center