Board of Governors of the Federal Reserve System

Figure 1. How stress testing works for large banks

Caption: The Federal Reserve conducts stress tests to ensure that large banks are sufficiently capitalized and able to lend to households and businesses even in a severe recession. The stress tests evaluate the financial resilience of banks by estimating losses, revenues, expenses, and resulting capital levels under hypothetical recession scenarios.

In this infographic, there are three arrows on the left side that are facing to the right.

The first arrow says, "The Federal Reserve develops stress test scenarios."

The second arrow says, "The Federal Reserve develops or selects stress test models."

The third arrow says, "Banks submit detailed bank data."

The arrows are pointing to box in the middle of the figure that says, "Using the scenario data and bank data as variables in the stress test models, the Federal Reserve projects how banks are likely to perform under hypothetical economic conditions.”

The middle box is pointing to a box on the right side that says, "The Federal Reserve uses the results of the supervisory stress test, in part, to set capital requirements for participating banks."