What are the types of stress tests?
There are two main types of stress tests currently in use in the American banking industry. The test a bank takes is generally based on the size of the bank's assets. The more assets, the more testing is required and the more vigorous it becomes. Here are the two tests:
Comprehensive Capital Analysis and Review (CCAR)
The Comprehensive Capital Analysis and Review (CCAR) testing is for banks with more than $100 billion in assets. It's essentially a review of the bank on paper, with a quantitative and qualitative component. The goal is to see if the bank has sufficient capital to continue operations through a crisis and whether its capital planning process can ensure income despite its specific risk factors.
Dodd-Frank Act Stress Test (DFAST)
The Dodd-Frank Act Stress Test (DFAST) applies to banks with over $250 billion in assets. In this test, the Federal Reserve provides banks with specific economic baseline scenarios that change yearly, along with some very grim potential scenarios that could occur. These are not predictive in any way but are meant to test the absolute limits of what a bank could handle. The Federal Reserve then sets the bank's capital requirements based on how they perform.
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