is complex and costly to administer
may result in inadequate planningexample of stress testingbanks and financial institutions often use the federal reserve s dodd franklin act stress test dfast and comprehensive capital analysis and review ccar stress test 2 the federal reserve administers the comprehensive capital analysis and review stress test annually for banks with at least 100 billion in assets this test identifies whether banks have sufficient capital to operate during economic downturns and plans in place to address such events and other associated risks specifically the federal reserve looks at the bank s capital its plans for its capital e g dividends and how it assesses capital needs the dodd franklin act stress test dfast required for banks with at least 250 billion in assets is often used in conjunction with the ccar 3 this test can be conducted directly by the federal reserve or by financial institutions under the direction of the fed this like the ccar reviews whether a bank or financial institution has enough capital to account for losses and continue operations in the event of economic turmoil as of march 2020 federal home loan banks are no longer required to conduct dodd frank act stress tests 3 although both tests have similar goals they are administered differently to address as many possible events and risks stress testing faqsstress testing is an analytical technique to show how a financial services company or bank will be affected by certain financial events or situations in other words it shows what can happen and how well prepared institutions are when certain stressors are introduced the federal reserve requires banks of a certain size to perform stress tests such as the dodd frank act stress test dfast or the comprehensive capital analysis and review ccar these tests review the bank s capital and how well it can meet obligations and operate during trying economic times stress testing is often performed using computer simulations running different scenarios companies might use historical events hypothetical situations or simulations to test how well a company would operate under specific conditions if a company fails a stress test it may be required to increase its capital reserves or form contingency plans to address threats in the banking and financial services industry some failures result in fines or the prohibition of certain activities such as paying dividends the bottom linestress tests can be effective analytical tools in identifying whether a company has sufficient capital strong assets and effective plans to weather an economic storm companies can use historical hypothetical or simulated events to create test scenarios or they may be required by a regulatory body to perform certain tests the results can help companies better understand their strengths weaknesses and areas of opportunity 