C3.7 Integrated stress and reverse stress

European stress-test methodology and guidelines [25]

What it requires. A stress test is one scenario run through the whole of the organization's model of itself, year by year, moving losses, income, capital or cash and liquidity together, under rules written in advance that stop the projection from improving itself. An inventory records which scenarios exist, who owns them and when each was last run, and distinguishes a sensitivity, which moves one input, from a scenario, which moves many, from a reverse stress test, which searches for the scenario that breaks a stated objective. A management action counts only if it was decided in advance, carries a trigger and has been tested for feasibility under the stress in which it would be needed.

Where it comes from. The European exercise of 2025 and the guidelines behind it [25] are the only document in the set in which a single scenario moves every line at once under rules that stop the result being flattered: credit losses follow prescribed stage migrations, net interest income may not rise, capital is recomputed each year against the thresholds that bite. The guidelines add the inventory, the three-way distinction and the conditions on management actions.

What it reconciles. Chapter 11 kept all five words of its twelfth cluster, each with one meaning, and this component is where four of them are used together. It replaces the departmental stress exercises every discipline runs, continuity on one process, projects on a schedule, budgets on one variable, with the single run that finds the interaction doing the damage. The engine is kept and the European parameters left behind, so the same component serves a bank under its supervisor's thresholds and a university under its covenants. An action never tested under stress is a hope, not a response.