Stress tests for financial institutions are, supposedly, the measurement of the impact that adverse economic conditions will produce in the situation of a bank or other financial institutions.
That is true but, who decides which are this supposed worse economic conditions?
This is not a trivial point. We remember that back in April 2010 a stress test was effected to European banks. Almost all of them "passed" the exam. A few months later three Iris banks required the financial support of the Government in order to avoid bankruptcy.
The test measurement was not effective.
Last week the European Central Bank conducted a new ser of tests. This time a handful of banks showed a weaker financial condition (lack of capital to support its credits)
We will see if this time the tests were done correctly.
In any event this is a rather complicated subject from a technical perspective.We will see this in future posts from a simple and understandable point of view