They may test the instrument under, for example, the following stresses: This type of analysis has become increasingly widespread, and has been taken up by various governmental bodies (such as the PRA in the UK or inter-governmental bodies such as the European Banking Authority (EBA) and the International Monetary Fund) as a regulatory requirement on certain financial institutions to ensure adequate capital allocation levels to cover potential losses incurred during extreme, but plausible, events.
There is also usually the ability to test the current exposure to a known historical scenario (such as the Russian debt default in 1998 or 9/11 attacks) to ensure the liquidity of the institution.
[3]: 19 In 1996, the Basel Capital Accord was amended to require banks and investment firms to conduct stress tests to determine their ability to respond to market events.
[3]: 1 Since then, stress tests have been routinely performed by financial regulators in different countries or regions, to ensure that the banks under their authority are engaging in practices likely to avoid negative outcomes.
[6] In 2012, federal regulators also began recommending portfolio stress testing as a sound risk management practice for community banks or institutions that were too small to fall under Dodd-Frank's requirements.
The Office of the Comptroller of the Currency (OCC) in an October 18, 2012, Bulletin recommends stress testing as a means to identify and quantify loan portfolio risk.
As part of Central Banks' market infrastructure oversight functions, stress tests have been applied to payment and securities settlement systems.
By using stress tests it is possible to evaluate the short term effects of events such as bank failures or technical communication breakdowns that lead to the inability of chosen participants to send payments.