The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper illustrates how stress tests of banking systems may be designed to evaluate banks' reaction to shocks of increasing intensity, up to the point where regulatory norms are breached, or banks become insolvent. This approach offers useful insight and guidance for regulatory policy and intervention, using existing methodology and data. The illustrations presented in this paper are a small sample of the wide variety of shocks, scenarios, and assumptions to which this approach may be applied.