The Reserve Bank’s philosophy and approach to stress testing
Stress tests play an important role in the Reserve Bank’s supervision of the banking system. Firstly, stress tests improve understanding of the implications of current and emerging risks to financial stability. Secondly, stress tests help assess the resilience of participating banks to severe but plausible scenarios. Results provide one lens on capital adequacy rather than a final conclusion, reflecting the uncertainty around how stress scenarios would play out and the level of capital required to maintain market confidence. Finally, supervisory tests make a significant contribution to the development of risk management capability at participating banks.