Stress testing
Also called supervisory stress test, capital stress testing
Stress testing is the modelling of how a bank's capital, liquidity and earnings would hold up under severe but plausible shocks, such as a deep recession or market crash. Supervisors run system-wide tests on the largest banks, and banks run their own. Results feed capital requirements and contingency plans.
How it works
Supervisors publish adverse scenarios with paths for GDP, unemployment, house prices and market prices. Banks project losses, income and capital over several years under each scenario, using loan-level and trading data. Supervisors challenge or replace bank models with their own. Results are published and compared against minimum capital ratios. Banks also run internal tests for capital and liquidity planning.
In the US, results set each large bank's stress capital buffer. On 30 September 2026 the Federal Reserve finalised rules to average two years of results from 2028 and to consult on scenarios each year. The EBA test has no pass or fail mark but feeds Pillar 2 decisions. The Bank of England now runs its capital stress test every two years.
The rules
Sets principles on governance, scenarios, data, models and use of results for bank and supervisory stress testing.
Banks and supervisors in Basel Committee jurisdictionsFinal rules average two years of stress results from 2028 and add annual public comment on scenarios and models.
US bank holding companies and intermediate holding companies with $100 billion or more in assetsRequires supervisors to carry out annual supervisory stress testing of institutions, supporting the review and evaluation process.
EU credit institutions and their supervisorsCommon questions
What is the stress capital buffer?
The stress capital buffer is a US capital requirement for large banks, set using the Federal Reserve's stress test results. It reflects projected capital decline under the severely adverse scenario plus planned dividends. From 2028 the Fed will average the two most recent tests to set it.
Does the EBA stress test have a pass mark?
No. The EU-wide stress test has no predefined pass or fail threshold. Supervisors use the results in the Supervisory Review and Evaluation Process to set Pillar 2 guidance. The 2025 exercise covered 64 banks and was published on 1 August 2025.
How often does the Bank of England stress test banks?
The Bank of England runs its Bank Capital Stress Test for the largest UK banks and building societies every other year. Results of the 2025 test were published on 2 December 2025, and the next full test is expected in 2027.
What is the difference between stress testing and scenario analysis?
Stress testing usually means quantified projections of capital or liquidity under severe shocks with defined outputs. Scenario analysis is broader and can be qualitative, exploring long-term or emerging risks such as climate change without setting capital directly.
