Stress Testing in Wartime and in Peacetime

Stress testing served us well as a crisis management tool, and we see it applied increasingly to peacetime oversight of banks and banking systems. It is rapidly becoming the dominant supervisory tool on both sides of the Atlantic. Yet the objectives and certainly the conditions are quite different, and to date we see a range of practices across jurisdictions. Stress testing has proved to be enormously useful, not just for the supervisors but also for the banks. Using a simple taxonomy of stress testing-–scenario design, models and projections, and disclosure--I analyze some of those different approaches with a view to examining how wartime stress testing can be adapted to peacetime concerns.