A Bank Stress Test is a critical analysis of a financial institution’s ability to withstand negative economic conditions. The goal of these tests is to ensure that banks have enough capital in reserve to cover any potential losses during times of recession or market instability. In the United States, all banks with assets totaling $50 billion or more are required to undergo regular stress tests conducted by their own risk management teams and the Federal Reserve.Bank stress tests were put in place after the 2008 financial crisis as a way to prevent future meltdowns. Many banks and other financial institutions were left severely under capitalized after the crisis, which revealed their vulnerability to market crashes and economic downturns. As a result, federal and financial authorities greatly expanded regulatory reporting requirements focused on adequacy of capital reserves and internal strategies for managing capital levels. Banks must now regularly determine their solvency and document it accordingly.
