Every year the Federal Reserve puts banks through a series of annual “stress tests” which gauge whether banks are healthy enough to keep lending through an economic meltdown and whether they can continue with their dividend payouts and share buyback plans. This is the eight consecutive year the Fed has executed the stress tests and is intended to give the public confidence that banks are better prepared for the next crisis. In the early years many banks flunked these tests, but they have fared better in recent years after raising hundreds of billions of dollars in capital and taking an ax to riskier businesses.
This years test was the toughest to date, laying out a doomsday scenario of double-digit unemployment, cratering home and stock prices, and soaring losses on credit cards and car loans. Of the 35 banks that went through the test only Deutsche Bank failed.
Stress testing is a similar exercise that I perform on the portfolios that I manage. I want to see how portfolios and investments would react if there is an interest rate rise, or if we see a similar bear market to what we saw in 2008 and 2009. On the positive side I also want to know what to expect if there is a bull market like we saw in 2013.
Here is a page from my website where you can read more about how I manage risk and stress test the portfolios I work with. http://bautisfinancial.com/fearless-investing