What is Bank stress test’
Test Bank stress analysis in a hypothetical adverse economic scenarios, such as a deep recession or financial crisis, designed to determine whether a Bank has enough capital to withstand the impact of negative economic phenomena. In the United States, banks, $ 50 billion or more in assets are required to do an internal stress tests, according to their own risk management, Federal reserve system.
The breaking down of the Bank stress test’
The stress tests will focus on a few key risks such as credit risk, market risk and liquidity risk of banks ‘ financial health in crisis situations. Hypothetical crises is determined using various factors from the Federal reserve and the International monetary Fund (IMF). The Bank stress tests were put in place and become more widespread after the global financial crisis of 2007-2009, the worst since the great Depression. This crisis left many banks and financial institutions severely undercapitalized that the stress tests are aimed at preventing.
Two types of stress tests
The Federal reserve conducts annual Supervisory stress tests of banks, $ 50 billion in assets. The main purpose of the stress test to see whether the Bank has the capital to manage themselves in difficult times. Company-run stress tests are conducted on a semiannual basis and are subject to strict reporting deadlines.
The European Central Bank (ECB) also has strict requirements stress testing, which cover about 70 percent of banking institutions in the Eurozone.
All stress tests involve a common set of scenarios, some worse than others, for banks to appreciate. An example is a hypothetical situation only after going on simultaneously: a 10 percent unemployment rate, the overall 15 percent stock drop, and a 30% fall in house prices. Then banks use the following nine quarters of projected financials to determine if they have enough capital to survive the crisis.
The impact of stress tests
Banks pass the stress tests have to publish their results. These results are then released to the public, to show how the Bank will conduct a serious crisis. The new rules require companies that have not passed the stress tests, in order to reduce dividend payments and share buybacks with the aim of preserving capital.
Sometimes banks give conditional pass the stress test. This means, came to the Bank to close, to not stress test the risks and opportunities for the further distribution in the future. Banks that pass on a conditional basis must submit a plan of action. Banks that fail the stress tests look bad in the eyes of the public in connection with the threat of financial disaster. Foreign banks, such as santander and Deutsche Bank failed the stress tests a few times.