Stress Testing in Financial Institutions

Stress testing in financial institutions is a method used to evaluate how a bank or financial firm would perform under adverse economic conditions, like a recession or a financial crisis. Essentially, it involves simulating various stressful scenarios—such as a significant economic downturn or a sudden loss of assets—and assessing the institution's resilience, liquidity, and capital adequacy. The results help regulators and management understand potential vulnerabilities and ensure that institutions are prepared to withstand financial shocks, ultimately promoting stability in the economy and protecting depositors' interests.