Stress testing has become a critical tool for evaluating the resilience of banks in the face of adverse economic scenarios. Recently, key regulatory bodies in the US, EU, and UK, including the US Federal Reserve (FED), the US Office of the Comptroller of the Currency (OCC), the European Banking Authority (EBA), the European Central Bank (ECB), and the Bank of England (BoE), have released updates related to their stress testing exercises.
This article delves into the nuances of these approaches, highlighting the key variations and their implications for the global banking landscape.
Stress testing in the US
In the United States, the FED uses the Comprehensive Capital Analysis and Review (CCAR) process, which entails quantitative assessments of capital ratios and qualitative assessments of capital planning and risk management frameworks of banks. The FED will test 22 banks this year and has released two hypothetical scenarios for its annual stress test—baseline and severely adverse scenarios. The FED has included, in its exercise, two hypothetical elements to probe different risks through its "exploratory analysis." One of these elements examines how banks would react to credit and liquidity shocks in the non-bank financial institution sector during a severe global recession. The second element includes a market shock that will be applied only to the largest and most complex banks and hypothesizes the failure of five large hedge funds with reduced global economic activity and higher inflation.
The FED stress tests cover bank holding companies (BHCs), covered savings and loan holding companies (SLHCs), and intermediate holding companies (IHCs) of foreign banking organizations (FBOs) with USD 100 billion or more in assets. The OCC also conducts stress test and is responsible for supervising national banks in the US. OCC generally aligns its methodologies with the FED approach, also providing supervisory guidance to banks on stress testing and risk management practices. For its upcoming exercise, OCC recently published the scenarios and templates for banks with over USD 250 billion in assets.
Stress testing in the EU
The EBA coordinates EU-wide stress tests, utilizing a "bottom-up" approach (with some top-down elements), wherein banks calculate their projections under common scenarios. The 2025 exercise includes baseline and adverse scenarios addressing macroeconomic shocks, geopolitical risks, and interest rate volatility. The EBA evaluates capital adequacy, ensuring banks can maintain sufficient buffers under stress. Transparency is also a key feature, with public disclosure of results. Along with the two scenarios, the EBA has also published methodology note, templates, and frequently asked questions on the stress testing exercise.
The ECB, as the direct supervisor of significant Eurozone banks, conducts its own stress tests, often in parallel with the EBA exercise. These tests feed into the Supervisory Review and Evaluation Process (SREP), influencing supervisory decisions. This year, the ECB is examining 51 of the euro area’s largest banks (representing 75% of banking assets) and conducting its own stress test on 45 medium-size banks, which are not included in the EBA sample. The ECB will also conduct a scenario analysis of counterparty credit risk for selected banks.
Stress testing in the UK
The BoE has recently updated its stress testing approach, though it has not yet issued specific scenarios for its upcoming stress testing exercise. The updated approach combines the predictability of regular stress testing to risks from the financial cycle with the adaptability the BoE has been using over recent years to explore different risks. The approach is based on the following three components:
Bank Capital Stress Test: The BoE expects to conduct a Bank Capital Stress Test every other year to test risks related to the financial cycle, involving the largest and most systemic UK banks. This will inform the setting of capital buffers for the banking system and individual banks.
Supplementary Stress Testing: In the intervening years, the BoE expects to use stress testing, when appropriate, to supplement its assessment of the resilience of the banking system to risks related to the financial cycle. This will be done in a less burdensome way, such as through desk-based exercises. Such exercises could be carried out at different levels of granularity or with multiple scenarios, allowing more adaptability in the approach to assessing risks and vulnerabilities.
Exploratory Exercise: BoE will use exploratory exercises to assess other risks, including structural and emerging risks not closely linked to the financial cycle. These exercises will be timed based on the risk environment and the sequencing and timing of other stress tests. BoE notes that stress test exercises based on exploratory scenarios have proven to be successful so far—for example, the 2021 climate biennial exploratory scenario.
A complex global landscape
While these five regulators share the common goal of promoting financial stability, their stress testing approaches reflect distinct regulatory mandates, economic contexts, and supervisory priorities. The evolving nature of stress testing, with increasing emphasis on climate risk and other emerging threats, underscores the importance of ongoing dialog and cooperation among regulators. As the global economy faces new challenges, stress testing will remain essential for identifying vulnerabilities and ensuring a resilient financial system.
Related links
LEARN MORE
Find out how we can help
Moody’s brings together data, experience, and best practice capabilities, with our specialized and agile intelligence.