Stress Testing

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Stress Tests on Banks

Sri Harsha CVR,

1st Year MBA,

BITS Pilani.

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Stress Tests on Banks

Sri Harsha CVR,

1st Year MBA,

BITS Pilani.

Introduction

We, humans have blood pressure tests to check our stress levels using a Sphygmomanometer. In the similar way, Regulators execute stress tests on banks to determine how effectively a bank can withstand a stress under unfavourable economic context and also whether a bank has enough capital to absorb the financial contingencies or uncertainties. Banks usually carry out Stress tests either internally as part of their own risk management, or Regulators of respective economies conducts them externally. These tests are meant to identify the areas in which a bank is vulnerable, so that preventive action can be initiated by the banks and regulators.These stress tests mainly focus on vital risks such as Credit Risk, Liquidity Risk and Market Risk. Banks’ stress tests have gained prominence in 2008, as the financial bubble or credit fiasco undermined capital base of many banks and financial institutions.European Banking Authority Stress Tests-2014 | |

European Banking Authority (EBA), the regulatory authority of European Union, recently published results of stress tests it conducted along with European Central bank (ECB) on various European Banks. Earlier, this year, in January, EBA announced its plans for conducting EU wide stress tests. Approximately Twenty Five out of 130 Largest European Banks have failed in these stress tests which were recently concluded.

The results of these stress tests staggered the EU economies, by bringing to the fore the fact that there is a capital shortfall of 25 billion Euros, with the biggest threat lurking in Italy. As a part of these stress tests, ECB conducted thorough checking, auditing of loan books mortgages and other housekeeping areas of the banks. These findings put specific focus on...