Stress Testing is a technique used to evaluate how a financial institution, portfolio, or system performs under extreme adverse conditions.
Stress Testing involves simulating worst-case scenarios such as economic recession, market crash, or sudden interest rate changes to assess potential losses and resilience.
It is widely used by banks, financial institutions, and regulators to ensure stability of the financial system. In India, stress testing is monitored by the Reserve Bank of India.
"A bank tests how its loan portfolio would perform if unemployment rises sharply and borrowers default—this is stress testing."