Meaning
Stress testing is a critical risk management exercise for financial institutions.Definition
It’s a simulation used to assess a bank’s resilience and financial stability under extreme but plausible adverse economic scenarios, like severe recessions, market crashes, or credit shocks.Objectives
The primary objectives are to identify potential vulnerabilities, ensure sufficient capital buffers to absorb losses, and inform risk management strategies and capital planning.Key Scenarios
Common scenarios involve sharp economic downturns, significant increases in interest rates, credit portfolio deterioration, or sudden declines in asset values.Author
