Stress test
Also called: Stress testing · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
A stress test is a "what if" exercise. It estimates how banks, or the whole financial system, would cope with a very bad situation, such as a deep recession or a market crash. It checks whether bad loans would rise so much that capital fell below the required minimum. Stress tests help regulators find weak banks before a real crisis. RBI publishes stress-test results in its half-yearly Financial Stability Report (June and December).
Example
In the Financial Stability Report, RBI runs baseline, medium and severe scenarios. In each one, it projects bad loans and capital for scheduled commercial banks. The report checks whether the system's CRAR stays above the 9% minimum even under severe stress.
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