Stress testing is a critical process that evaluates how banks would perform under hypothetical adverse economic conditions. It's a key tool for ensuring banking sector stability.
The main objectives are identifying bank vulnerabilities, improving risk management practices, and ensuring banks can continue lending even during crises.
Regulators create hypothetical but plausible adverse scenarios — like GDP falling 5%, unemployment doubling, or asset prices dropping 30% — and assess how each bank's capital and operations would be affected.
In Bangladesh, Bangladesh Bank regularly conducts stress tests to assess the stability of the banking sector and identify potential risks.