What is the purpose of a stress test in banking regulation?

• A. To assess a bank's resilience under severe, plausible scenarios and inform capital and liquidity requirements.
• B. To forecast stock prices.
• C. To measure customer satisfaction.
• D. To set interest rates for central bank operations.

Answer: (A)

Stress testing in banking regulation is about evaluating how a bank would perform under severe but plausible economic scenarios and using those results to judge whether it would have enough capital and liquidity to withstand a crisis. By projecting losses, earnings, and cash flows under adverse conditions, regulators determine if current capital buffers and liquidity standards are sufficient or need to be adjusted. This helps ensure the bank can continue operating and meeting its obligations even in tough times. The other options don’t fit because forecasting stock prices, measuring customer satisfaction, or setting central bank interest rates are not the regulatory goal of stress tests.