Bank stress testing is a framework for analyzing the financial impact of unfavorable economic scenarios to ensure that banks have sufficient capital to maintain operations during such situations. After the failure of standard bank stress testing to prevent the global financial and economic crisis in 2007–2008, regulators around the world promptly expanded the scope and degrees of unfavorable scenarios in order to limit or prevent another systemic failure in financial services.

Currently, requirements for bank stress testing are among the most important risk regulations in the financial services industry. Examples of bank stress testing required by regulation include:

• CCAR and DFAST by the Federal Reserve
• EU-wide stress testing by the European Banking Authority
• Annual industry stress test by the Bank of England

To perform bank stress testing, risk managers use various mathematical and statistical techniques to calculate the financial impact per economic scenario, including:

• Linear models
• Econometrics models (e.g., interest rate models and GARCH models)
• Monte Carlo simulation
• Quantitative risk models

For more information, see Statistics and Machine Learning Toolbox™, Financial Toolbox™, Financial Instruments Toolbox™, and Risk Management Toolbox™.