The stress tests were authorized by the Dodd-Frank financial reform law, and are aimed at ensuring that a bank's finances are such that it could withstand a strong economic downturn without endangering its solvency. Under the tests, banks would subject their finances to a range of hypothetical economic situations, ranging from "baseline" to "severely adverse."
"Implementation of the Dodd-Frank stress test requirement is an important step in the Federal Reserve's efforts to promote the health of the financial sector," said Fed Governor Daniel K. Tarullo. "Stress testing is a key tool to ensure that financial companies have enough capital to weather a severe economic downturn without posing a risk to their communities, other financial institutions, or to the general economy."
A little more than 100 financial institutions would currently be subjected to the stress tests, and regulators will release the economic conditions to serve as test baselines later this year.
This post updated at 2:45 pm.