What is a Bank Stress Test?

What is a bank stress test?

1 Answer

A Bank Stress Test is a forward "what-if" analysis of a given banks on and off balance sheet assets. The analysis usually has two different economic scenarios:

  • a baseline scenario

  • a more economically adverse scenario.

The purpose of the stress test is to ensure that core banks of US economy have enough capital to perform their functions and aide in economic recovery under even worse economic conditions and to prove they can sustain losses for a two year period.

The stress test is being administered by Federal Banking Regulators on a inter agency basis. If a specific bank does not meet the test requirements they will be given 6 months to raise sufficient assets to meet requirements. The test must be completed by no later than the end of April 2009.