Continual Stress Tests: Peace Of Mind For Banks And Regulators

The slow economic recovery has resulted in a vastly altered landscape for banks and other financial institutions. Regulation and oversight are on the rise as lawmakers and regulators seek to learn from the events of the past few years and mitigate systemic risk. Self-regulation and the adoption of industry best practices are likely to increase.

As regulators seek to toughen the capital requirements governing U.S. financial institutions in an effort to minimize risk to the nation's financial system, stress tests are commanding headlines. Stress tests evaluate the extent of losses a bank would sustain in its major asset categories under a troubled economic scenario, along with the impact those losses would have on the bank's revenue and capital adequacy. If they are implemented effectively, stress tests may turn out to be exceptionally valuable regulatory tools. The Federal Reserve Bank underscored their significance by requiring 19 of the country's largest banks