Principles for Sound Stress Testing Practices & Supervision

The depth and duration of the financial crisis has led many banks and supervisory authorities to question whether stress testing practices were sufficient prior to the crisis and whether they were adequate to cope with rapidly changing circumstances. In particular, not only was the crisis far more severe in many respects than was indicated by banks' stress testing results, but it was possibly compounded by weaknesses in stress testing practices in reaction to the unfolding events. Even as the crisis is not over yet there are already lessons for banks and supervisors emerging from this episode.