“Stress tests typically cover solvency – whether banks have enough capital to absorb losses – and liquidity, whether they have enough cash to pay out their deposits and other debts. Let’s say a bank loses $1 billion when house prices drop by 50 percent. The bank can survive – remain solvent – if its capital is $10 billion but not if it is $1 billion. What if a bank’s depositors panic and suddenly withdraw $50 million? If the bank is unable to borrow money to replace those deposits, it can survive if it owns assets, such as government bonds, that it can sell quickly.“
The document is available for download via the following links in English and Russian languages.
Source: IMF, FINANCE & DEVELOPMENT, SEPTEMBER 2019, VOL. 56, NO. 3