A simulation technique used to evaluate how financial institutions or portfolios would perform under adverse economic scenarios, such as market crashes, recessions, or extreme events. Regulators use stress tests to ensure systemic stability.
From Old French 'estresse' (narrowness, oppression) and Latin 'testum' (earthen pot, trial). Financial stress testing emerged after the 1970s oil crises and became mandatory for major banks following the 2008 financial crisis.
Financial stress testing is like putting your investment portfolio through a hurricane simulator to see if it can survive Category 5 market conditions. The Fed's annual stress tests literally determine which banks can pay dividends - fail the test, and shareholders get nothing until you build more capital!
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