Bank stress test

A bank stress test is an analysis of whether a bank has sufficient reserves to survive a hypothetical decline in economic conditions. If a bank fails a stress test, regulators may require that the bank supplement its capital reserves. By doing so, the regulators are improving the odds that there will be fewer bank collapses in the event of an actual decline in the economy. Stress tests were required after the 2008 financial crisis, since a number of banks were weakened by the crisis and needed to be recapitalized. The stress tests involve a number of standardized assumptions, including the impact of an increase in the unemployment rate, a decline in home prices, and a drop in the stock market.