Stress testing is a tool to assess the resilience of financial institutions to a hypothetical adverse event, such as a severe economic downturn.
In New Zealand, registered banks are required to conduct stress tests and report the results to their boards as part of their Internal Capital Adequacy Assessment Process (ICAAP). Stress tests also offer useful information to the Reserve Bank in its role as a prudential regulator.
The Reserve Bank periodically asks banks to run a stress test using a scenario specified by the Reserve Bank. This approach makes it easier to compare results across institutions and aggregate the findings to get an economy-wide view.
In May 2016, the Reserve Bank issued a discussion document on stress testing methodology for New Zealand incorporated banks.
Stress testing is a tool to assess how banks might cope with a severe economic downturn. This video explains how stress tests work and why the Reserve Bank of New Zealand uses them in its role as prudential regulator.
Results of stress tests
The Reserve Bank typically reports the results of stress tests for the aggregate financial system in the Financial Stability Report or other publications, including the examples below.