Pre-Stress and Post-Stress Capital in Bank Stress Tests

Summary

The document clarifies the terms pre-stress and post-stress capital in the context of Federal Reserve stress testing of bank holding companies. Pre-stress capital is the capital available before the hypothetical stress scenario is applied. Post-stress capital is the capital remaining after the scenario’s modeled losses and related effects are accounted for.

The cited explanation connects stress scenarios to market risk, credit risk, and other capital charges that affect capital ratios. The post-stress measure is used to assess whether a bank can absorb losses and continue operating as a financial intermediary, alongside specified regulatory capital thresholds. This is a brief conceptual clarification rather than a detailed description of the full stress-testing methodology; it does not explain how every loss, balance-sheet change, or regulatory adjustment is calculated.

Key ideas

• Pre-stress capital is the bank's capital before the hypothetical stress scenario is applied.
• Post-stress capital is the capital available after modeled stress effects are applied.
• Stress scenarios can affect capital through market risk, credit risk, and other charges.
• Post-stress capital helps assess whether a bank can absorb losses and continue operating.
• The explanation does not specify the detailed calculations used in a full supervisory stress test.

Tags

# What are pre and post stress capital?


# What are pre and post stress capital?












Fed papers make reference to a post-stress and pre-stress capital. I can't find definitions of these online, but from the context (below), it sounds like the post-stress capital is the estimated capital resulting from a Fed stress test of a bank holding company and pre-stress capital the capital going in.

Is my understanding correct?

Context:Fed Paper - CCAR and Stress Testing as Complementary Supervisory Tools

> Importantly, the SCAP assessed whether a BHC had sufficient capital to absorb losses and to continue to operate as a financial intermediary by requiring BHCs to meet a post-stress tier 1 common equity ratio of 4 percent and a tier 1 risk-based capital ratio of 6 percent

## Answer by user12348 (score 1, accepted)

https://quant.stackexchange.com/a/21433

Yes, your guess is right. Basically the stress test scenarios result in Market Risk, Credit Risk and other capital charges which alter the tier 1 capital requirement. Tier 1 known, as going-concern divided by Total capital is the ratio they are looking at. Post stress capital is the tier 1 capital that is available after the application of the stress scenario.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.