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This lesson is a part of the course Credit Risk Management
Basel II has laid out detailed norms for stress test and scenario analysis. Areas covered include stress testing methodologies, scenario selection, supervision, etc. In the financial recession of 2008, many banks realized that they had not prepared themselves for a crisis that was so long drawn and deep. They came to the conclusion that the stress testing mechanisms they were using had perhaps underreported the risks. Stress testing helps send up red flags for possibly adverse outcomes. This enables the bank to create a capital cushion to absorb and tide over the crisis.
