Supervisory authorities use regulatory stress tests (such as the CCAR process in the United States or the EBA stress tests in Europe) to evaluate the resilience of the banking sector under severe economic conditions.
The Regulatory Stress Testing Pipeline
[Regulators Publish Scenario Parameters] 
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[Banks Apply Shocks to Portfolios] ------> Models net income drops and loan default spikes
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[Compute Post-Stress Capital Ratios] ---> Evaluates if capital stays above minimum baselines
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[Enforce Remediation Restraints] --------> Restricts capital distributions if ratios fail

By forcing banks to project their financial performance under coordinated, severe macroeconomic shocks (such as a sudden jump in global unemployment combined with an equity market collapse), supervisors can identify vulnerable institutions and require them to raise additional capital before a real crisis occurs.
 
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