What is the primary goal of "Stress Testing" for banks under FDIC supervision?

The primary goal of "Stress Testing" for banks under FDIC supervision is to evaluate a bank's resilience to economic shocks. This process involves simulating various adverse economic scenarios to understand how the bank would react under stress conditions, such as a severe recession or financial crisis. By assessing the potential impact on the bank's capital and financial stability, regulators can ensure that the bank maintains sufficient capital to absorb losses and continue operating effectively.

Stress testing helps in identifying vulnerabilities within the bank's balance sheet and overall financial health. It allows banks to prepare and implement strategies to mitigate risks, ensuring they are equipped to withstand economic downturns. This evaluation fosters a robust financial system, thereby protecting depositors and maintaining confidence in the banking sector.