Bank Stress Tests

About Bank Stress Tests

Bank stress tests were introduced as a key supervisory tool after the 2008 crisis. The Federal Reserve conducts annual Comprehensive Capital Analysis and Review, or CCAR, for large banks. The European Banking Authority conducts stress tests across the EU. Stress tests model bank solvency under adverse economic scenarios including recession, market crashes, and sovereign defaults. The 2009 US stress test, called the Supervisory Capital Assessment Program, restored confidence in US banks. The 2011 European stress tests were criticized for passing banks that failed shortly after, including Dexia. Stress tests require banks to hold sufficient capital to continue lending during downturns. Banks have adapted by managing their balance sheets to pass tests, a practice critics call teaching to the test.