What is stress testing in financial services?

What is stress testing in financial services?

Stress testing in financial services is a simulation technique used to evaluate how financial institutions can handle economic shocks.

Why is stress testing important for banks?

It's crucial for banks to identify vulnerabilities, ensure compliance with regulations, and maintain financial stability during crises.

What are some common scenarios used in stress testing?

Common scenarios include economic downturns, sudden interest rate changes, and market crashes to assess potential impacts.

How often should stress tests be conducted?

Stress tests should be conducted regularly, typically annually, but can be more frequent during volatile market conditions.

What regulations govern stress testing in financial institutions?

Regulations like the Dodd-Frank Act in the U.S. and Basel III internationally set guidelines for stress testing practices.