What is a bank stress test?

Bank stress tests are devised by regulators who pose hypothetical future disadvantageous economic situations to banks in order to test them. Once the tests are ready for completion, they are handed over to the banks in the regulator’s jurisdiction. These tests are carried out under extreme supervision from the regulators.

Where have you heard about bank stress tests?

International banks started to use stress testing in the early 1990s. In 1996 it became a requirement for all banks and investment firms to undergo stress testing. At the beginning of the financial crisis it became mandatory for these tests to be carried out by outside regulators instead of by the banks themselves.

What you need to know about bank stress tests.

These bank stress tests evaluate whether the bank could survive the adverse economic situation, if they could remain in business and, most importantly, if they could remain active in the lending of money to businesses, households and individuals. Some of the main stress tests globally are as follows:

• Europe: The Bank of England, European Banking Authority and The Financial Services Authority
• Asia: Monetary Authority of Singapore, China Banking Regulatory Commission and the International Monitory Fund
• Americas: The Federal Reserve System, Comprehensive Capital Analysis and Review