Introduction to stress testing
Stress testing checks the resilience of companies as well as investment portfolios against a hypothetical possible future financial situations. - It's leveraged to gauge investment risk and the sufficiency of assets, as well as to assist in the evaluation of internal processes and controls. - In current years, regulators have also demanded that financial institutions need to carry out stress tests. This is done to guarantee that the capital holdings and other assets are safe.
Understanding Stress Testing
- Stress tests are meant to check the quality of a firm's risk governance as well as control processes. It is also used to assess quantitative measures of financial health.
- A well-designed stress-testing framework has defined protocols for management of stress test outputs, roles and responsibilities for model development and model validation, scenario design, and reporting and challenging of results.
Key Elements Of Stress Testing
- Stress testing is a computer-simulated technique. It can help to interpret whether different banks and investment portfolios prosper during hypothetical drastic economic scenarios.
