Definition
A simulation that models how financial institutions would perform under adverse economic scenarios, like asking 'what if everything goes wrong at once?' The results are somehow always better than reality when crises actually hit.
Example Usage
The bank passed the Federal Reserve's stress test, proving it could withstand a severe recession, until an actual recession revealed otherwise.
Origin
Risk management practice formalized by regulators after the 2008 financial crisis
Fun Fact
Stress tests typically model historical scenarios, guaranteeing they'll miss the next crisis since it will be different in creative ways nobody imagined.
Source: Banking regulation and risk management terminology
Related Terms
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See “stress test” in Corporate Speak, Gen-Z Slang, Pirate Speak, and more.
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