Bank Stress Test
Regulatory examination of a bank's ability to survive economic crises.
Definition
Stress tests are regulatory exercises where the Federal Reserve projects how banks would perform under severely adverse economic scenarios (deep recession, surging unemployment, plummeting asset prices). Results determine capital distribution capacity and reveal which banks have the thickest capital buffers.
Why It Matters
Stress test results directly determine how much capital a bank can return to shareholders through dividends and buybacks. Banks that fail stress tests face restrictions on capital actions and may need to raise equity.