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2010 EU-wide stress testing exercise

Q1: What does it mean to stress test a bank?

A: Stress tests are an important risk management tool that has been used for a number of years now, both by banks as part of their internal risk management practices and by supervisors to assess the resilience of banks and of financial systems in general to possible shocks.

Stress tests assess adverse and unexpected outcomes related to a variety of risks, and provide an indication of how much capital might be needed to absorb losses would the shocks that have been assumed actually occur. Usually stress tests envisage a set of hypothetical “what if” scenarios with different degrees of severity.

Stress tests do not provide forecasts of expected outcomes: the adverse scenarios are designed as “what-if” scenarios reflecting severe assumptions which are therefore not very likely to materialise.

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