Banking system stress tests are a key component of IMF/World Bank financial stability assessments.

This paper highlights the policy uncertainty inherent in using stress tests, both to set minimum bank capital requirements and to assess the capital adequacy needed to maintain banking system stability.

Regulatory forecasts of bank performance over hypothetical multiyear stress scenarios are used to set financial institution minimum regulatory capital requirements in multiple jurisdictions, yet little is known about the accuracy of these supervisory stress test models.

Multi-year forecasts of bank performance under stressful economic conditions determine large institution regulatory capital requirements and yet the accuracy of these forecasts is undocumented. I compare the accuracies of alternative stress test model forecasts using the financial crisis as the...