The risk tool that came of age in the 2008 crisis, now turned on climate: would bank capital hold if the worst case arrived?
Stress testing is a risk management tool that helps decision-makers evaluate the resilience of a given entity or the financial system as a whole in the worst-case scenario. Stress testing is widely used by regulators and risk managers of banks and financial institutions to assess the potential impacts of plausible severe future events.
Stress testing came to the fore as a crucial tool for regulators and risk managers of banks and financial institutions during the 2008-09 financial crisis. Central banks periodically conduct such tests to assess the resilience of the financial system and its individual components against various macroeconomic and financial risks. This process includes quantitatively evaluating whether bank capital would fall below given thresholds if certain risks were to materialize.
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