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Stress testing

The assessment of model behavior, financial impact, or institutional resilience under severe or adverse conditions. Stress tests can challenge assumptions, data, relationships, limits, capital, liquidity, and management actions.

Last updated: Last reviewed by: Model Risk Directory editorial team

How the term is used in model risk management

The assessment of model behavior, financial impact, or institutional resilience under severe or adverse conditions. Stress tests can challenge assumptions, data, relationships, limits, capital, liquidity, and management actions. The exact implementation varies by institution, model type, risk rating, and governing framework. Use the linked regulatory pages and buyer guides below for scope-specific requirements.

Related glossary terms

Sensitivity analysisBenchmarking (model risk)Model uncertainty

Guides and frameworks that use this term

GuideModel Risk ValidationModel risk validation is the independent testing of a specific model's conceptual soundness, ongoing performance, and outcomes, performed by staff or a third-party firm genuinely separate from that model's development. It is the 'effective challenge' function required under SR 26-2 and SR 11-7, distinct from broader model risk management program design.GuideModel Risk ManagementModel risk management (MRM) is the discipline of identifying, measuring, and controlling the risk that a bank's quantitative models produce incorrect or misused results. An MRM advisory firm helps build or run that discipline: model inventory, tiering, governance, and independent validation, rooted in Federal Reserve SR 26-2 (formerly SR 11-7) and OCC guidance.FrameworkBCBS Core PrinciplesThe Basel Committee does not publish a single, general-purpose MRM standard equivalent to SR 26-2. Its Core Principles, consolidated Basel Framework, and model-specific capital rules establish supervisory expectations for governance, risk measurement, validation, controls, and independent review that national regulators apply to banks using internal models.FrameworkHKMA CA-G-4HKMA CA-G-4 sets validation expectations for internal-ratings-based credit-risk systems used by authorized institutions. The current 2025 version covers governance, data, model design, quantitative and qualitative validation, use tests, stress testing, overrides, validation frequency, independence, findings, and supervisory review. It is model-specific rather than an enterprise-wide MRM standard.