Introduction

The Basel Committee previously published stress testing principles in May 2009 [See May 2009 Principles for sound stress testing practices and supervision.]. The 2009 principles were designed to address key weaknesses in stress testing practices that were highlighted by the global financial crisis. Since then, the role of stress testing has rapidly evolved and grown in importance in many jurisdictions. Stress testing is now a critical element of risk management for banks and a core tool for banking supervisors and macroprudential authorities. Stress testing is integral to banks’ risk management and banking supervision, in that it alerts bank management and supervisory authorities to unexpected adverse outcomes arising from a wide range of risks, and provides an indication to banks and supervisory authorities of the financial resources that might be needed to absorb losses should large shocks occur.