Stress Test

Banking supervisors the world over conduct regular stress tests on their banks to gauge how they might fare in the event of financial and economic shocks. The tests are simulations that test against adverse and severely adverse shocks. Stress tests tend not to have pass and fail marks per se but the results inform subsequent supervisory dialogue regarding any perceived vulnerabilities coming out of them. In the Eurozone and European Union, banks are subject to several types of stress tests annually and every two years by the European Central Bank and European Banking Authority (EBA). The EBA conducts EU-wide stress tests under the Supervisory Review and Evaluation Process (SREP). There are also thematic stress tests (for climate risk, liquidity risk, interest-rate risk), stress tests as part of banks’ comprehensive assessments (which also include an asset-quality review) to test for capital adequacy, and macroprudential stress tests to test financial and systemic stability. Authorities also reserve the right to conduct specific stress tests on individual banks or groups of banks as appropriate.