Bank stress test — post-stress CET1
Run one severe-but-plausiblescenario through a bank's balance sheet and check the result: CET1 ratio (stress) = (CET1₀ − stressed losses) / RWA. Macro shocks drive credit and market losses; the bank passes if post-stress CET1 stays above the 4.5% minimum. This is an illustrative teaching model, not a real regulatory engine.
Post-stress CET1 ratio1.2%
Post-stress CET1 ratio vs the 4.5% minimum and the 7.0% minimum-plus-buffer
Credit losses US$50.4bn (6.3% RWA)Market losses US$36.0bn (4.5% RWA)CET1 drawdown 10.8 pp
Starting CET1 ratio12.0%
Risk-weighted assets (US$bn)US$800bn
Equity / asset price fall−25%
Property price fall−15%
Stressed unemployment rate7%
Credit losses rise with the property fall and with unemployment above 4%.
Market losses rise with the equity / asset price fall. Loss rates are fixed and illustrative; RWA is held constant here.
Losses of US$86.4bn cut the CET1 ratio to 1.2%, below the 4.5% minimum. The bank fails and must raise capital or cut risk, and a supervisor could restrict its dividends and buybacks.
The US Federal Reserve runs this for real each year: the Dodd-Frank Act stress test (DFAST) and CCAR project losses and post-stress capital for large banks under supervisor-set scenarios. Passing can free a bank to return capital; failing constrains it.