Once the central bank publishes the stress scenarios, participating banks must run the macroeconomic variables through their internal forecasting models to project their financial performance over a 9-quarter horizon.
The Post-Stress Capital Calculation Model
The testing platform projects credit losses across loan portfolios, models drops in net interest income, and calculates the resulting impact on the bank’s capital adequacy ratios, written here in plain-text alphanumeric format to ensure formatting stability:
Post_Stress_CET1_Ratio = (Current_CET1_Capital - Projected_Credit_Losses - Operational_Costs) / Stress_RWA
Where:
- Post_Stress_CET1_Ratio = The bank’s projected Common Equity Tier 1 ratio at the worst point of the simulated crisis.
- Projected_Credit_Losses = Total estimated loan defaults and asset write-downs generated by the stress scenario variables.
- Stress_RWA = Risk-Weighted Assets adjusted to reflect the higher risk weights triggered by economic deterioration.
If a bank’s projected post-stress CET1 ratio drops below regulatory minimum safety limits, it fails the test, and the central bank restricts its ability to distribute dividends or pay executive bonuses until it raises additional capital.
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