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A computer-simulated approach called stress testing is used to evaluate how banks and investment portfolios perform in extreme economic conditions.

Stress testing aids in evaluating internal procedures and controls, as well as investment risk and the sufficiency of assets.

Stress testing may make use of real-world, imagined, or computer-generated events.

Regulations mandate that banks run a variety of stress tests and document their internal processes for handling capital and risk.

Banks with $100 billion or more in assets are required by the Federal Reserve to conduct a stress test.

Stress testing is a typical tool used by businesses that manage assets and investments to assess portfolio risk and implement any hedging techniques necessary to protect against potential losses. Their portfolio managers specifically use in-house, proprietary stress-testing methods to assess how well the assets they manage might withstand specific market developments and outside catastrophes.

Additionally, firms that want to make sure they have the right internal controls and processes in place frequently conduct asset and liability matching stress tests. The alignment of cash flow, payout levels, and other metrics is regularly checked in retirement and insurance portfolios as well

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